Short Selling
Short selling is selling borrowed shares in the hope of buying them back later at a lower price and profiting from a decline.
Short selling reverses the usual order of investing. Instead of buying first and selling later, a short seller borrows shares from a broker, sells them right away, and plans to buy them back later. If the price falls, the shares can be repurchased for less, and the difference is the profit. If the price rises, the short seller loses money.
Shorting requires a margin account. The short seller pays interest or a borrowing fee for the shares, and must also pay any dividends the stock distributes while the position is open. Hard-to-borrow stocks can be expensive to short.
The main risk is that losses are theoretically unlimited, because there is no ceiling on how high a stock price can go. A rapid price increase can trigger margin calls or a short squeeze.
Example: you short 100 shares at $50, receiving $5,000. If the price drops to $40, you buy back the shares for $4,000 and keep a $1,000 profit before fees. If it rises to $70, buying back costs $7,000, a $2,000 loss.