A:

Short selling is a fairly simple concept: you borrow a stock, sell the stock, and then buy the stock back to return it to the lender.

Short sellers make money by betting that the stock they sell will drop in price. If the stock drops after selling, the short seller buys it back at a lower price and returns it to the lender.

For example, if an investor thinks that Tesla, Inc. (TSLA) is overvalued at $341.25 per share, and is going to drop in price, she may borrow 10 shares of TSLA from her broker and sell it for the current market price of $341.25. If the stock goes down to $315.25, she could buy the 10 shares back at this price, return the shares to her broker, and net a profit of $341.25 (selling price) - $315.25 (buying price) = $26.00 per share.

However, if TSLA price rises to $375.50, the investor could net $341.25 - $375.50 = - $34.25 loss per share.

If you can't see the amplified risk right now, let's make it obvious: when you buy a stock (or go long) you can lose only the money that you've invested. So, if you bought one TSLA share at $341.25, the maximum you could lose is $341.25 because the stock cannot drop to less than $0. In other words, the minimum value that any stock can fall to is $0.

However, when you short sell, you can theoretically lose an infinite amount of money, because a stock's price can keep rising forever. Like in the example above, if you had a short position in TSLA (or short sold it) and it ended up rising to $375.50 before you exited your position, you would lose $34.25 per share.

While short selling does present investors with an opportunity to make profits in a declining or neutral market, it should only be attempted by sophisticated investors and advanced traders due to its risk of infinite losses.

Get more out of this involving topic -, see our tutorial on Short Selling and article on The Basics of Short Selling.

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