Short selling
Selling something you do not own, in the hope of buying it back cheaper. The losses work in the opposite direction to everything else.
To sell short you borrow shares from someone who owns them, sell them at today's price, and hope to buy them back later for less. You return the borrowed shares and keep the difference.
What makes it structurally different
A share you own can fall to zero — that is your maximum loss, and the most it can rise is unbounded. Short the same share and both are reversed: the most you can gain is the whole price falling to zero, and the most you can lose has no limit, because there is no ceiling on a share price.
That single asymmetry explains almost every unusual feature of short selling, including why it is dangerous in a way that ordinary investing is not.
The ongoing costs
- Borrow fees. You pay to borrow the shares, daily. Hard-to-borrow shares cost more, sometimes a great deal more.
- Dividends. If the company pays one, you owe it to the lender. You are short the dividend too.
- Recall. The lender can demand the shares back, forcing you to close at whatever the price is then.
Short squeezes
If a heavily shorted share rises, short sellers face losses and some must buy to close. That buying pushes the price up further, forcing more closures. The mechanism feeds itself.
The price rises because people are compelled to buy, not because anyone reassessed the company. That is why squeezes can be violent and why they frequently reverse — the buying was forced, and forced buying ends.
Why it exists at all
Short sellers supply liquidity, help prices reflect negative information, and have historically been among the more effective detectors of corporate fraud — they have a direct financial incentive to look for it, which few other market participants do.