So, what is short selling?

Short selling is the sale of something that you don’t own.  It’s most often associated with the sale of common stock.  You’ll hear on TV reports about a “short squeeze,” or that the shorts are hurting.

What is described above is a pretty simple example.   There are a few wrinkles in the process.   For example, the shares you sell are almost always borrowed from someone else.  The brokerage house secures them and then essentially “lends” you those shares.  There’s also risk, a lot or risk.  If XYZ Company were to release some spectacular news that drove the price from $100 to $150, you’re in trouble: you’re getting squeezed.  Your brokerage company may come to you to pony up some cash right away.  There’s no limit to how much you can lose if you make the wrong bet.

Short selling provides a service to the market.  If the share price starts to fall—and the company is heavily shorted—it provides a braking mechanism.  Those short in the stock enter the market as buyers.  You may have also heard the expression “short interest.”  Short interest is high when lots of people are shorting the stock; that is, there is widespread belief that the share price will fall.  A heavily  shorted stock is a vote of “no confidence” in the share price.

Short selling includes many risks and inexperienced investors shouldn’t consider it.