Short Selling

Short selling is the practice of borrowing shares in the hope that the you will have to pay back the shares at a lower price; thus profiting the difference.

Unlike the normal buying of stocks, short selling allows you to profit of a stock’s price going down; however, risk is technically infinite because you are borrowing shares, required to pay back those shares, and there is no ceiling on how high a stock’s price can go.

Example: Trader A believes Stock X should go from $20 to $15. By short selling, Trader A borrows shares from his stock brokerage at $20 in hopes of paying back those shares at $15. If Trader A borrowed 100 shares then he would have made a $500 profit ($2000 – $1500) from that $5 dollar decline.

Short selling requires the use of margin, so traders must apply before being able to sell short.

Speak Stocks: How to short a stock.
The Wild Investor: Shorting 101.