What is 'short selling'?

Short selling refers to the practice of selling a security that the seller does not own at the time of the sale. This is accomplished by borrowing the security from another party, typically a broker, with the intent of buying it back later at a lower price. The seller then hopes to profit from the decline in the security's price.

When the seller believes that the price of a particular stock is going to decrease, they sell shares they have borrowed, effectively creating a "short position." Later, they will need to "cover" the short by purchasing back the shares to return them to the lender. If the stock price indeed drops, the trader can buy back the shares at a lower price, return them, and keep the difference as profit.

This method of trading is considered high-risk because if the security’s price increases instead of decreasing, the seller will incur a loss, potentially facing unlimited risk if the price rises significantly. Understanding this practice is crucial for anyone involved in trading or securities markets, as it plays a vital role in market dynamics.