Definition

• Short selling is the act of selling stock you do not own with the intent of buying it back later at a lower price.
  
  

Function

• To sell a stock short, a trader must first borrow the shares. Stock brokers lend the shares of stock held in customers' accounts to short sellers. The stock broker charges interest on the value of the loaned shares.
  
  

Potential

• Short selling is a way to profit from falling stock prices. If the stock price goes down, the stock is bought back and the profit is the amount the stock value has fallen from the time it was sold short until it is bought back.
  
  

Warning

• Short sellers face the potential of unlimited losses if the sold short stock price goes up. The trader is required to have 150 percent of the value of the shorted stock in her account when the trade is placed, and if the stock price increases she may be required to add more cash or buy back the stock at a loss.
  
  

Effects

• If a lot of traders are short selling a particular stock, the added selling can help to push the stock price lower. If a stock with a high percentage of short interest rises in value, short sellers may start to buy stock pushing the price higher forcing more short sellers to buy back stock. This is called a "short squeeze," pushing a stock's price rapidly higher.