When you "short sell" a stock, you're betting that the price is going down. Now, for you to actually profit from the downswing the transaction has to be structu

When you "short sell" a stock, you're betting that the price is going down. Now, for you to actually profit from the downswing the transaction has to be structured in a certain way. The way this works is that you place an order with your broker to "short" a certain amount of stock. Let's say a lot of 100 shares. What they do is immediately purchase and then sell 100 shares. Let's say the price at this point is $100 a pop. Your account is thus credited $100 x 100 = $10,000. Now, a short sale entitles the broker to the equivalent number of shares to close the position (this is called "covering"). So, since in this case they purchased and sold 100 shares, you now owe them 100 shares. Let's say the price drops to $50 and you want to close. You simply buy 100 shares @ $50 and pay 100 x $50 = $5000. Remember how your account had been credited $10000? You're now left with $5000 which is your profit to keep. But... what if the price had gone up to $200? $400? In that case, you still owe them 100 shares. So you'd have to pay 100 x $200 = $20000 (leaving you with a net loss of $10k) or 100 x $400 = $40000 (leaving you with a net loss of $30k) respectively. As you can see, your downside is theoretically unlimited. This downside is particularly relevant with very small stocks. With a stock valued around $2/share, it's much easier for it to 10x in value than a $50-100/share stock. For this reason, you need to have one of the following tools available to you when shorting: 1) A great broker that will monitor and close out of huge losses 2) An opposing limit order (an order that triggers when a stock reaches a certain price, allowing you to cover) 3) A computerized trading system that will react to an adverse situation instantaneously.