@giarc: Shorting consists of borrowing as asset from someone to sell at the current market price and hoping it goes down in value, so you can buy it back for le

@giarc: Shorting consists of borrowing as asset from someone to sell at the current market price and hoping it goes down in value, so you can buy it back for less that you sold it and then return the asset to its owner. In this scenario, you take the difference in price, less the premium you paid the owner for the right to borrow. To give an example, say stock A is trading at $100, but you think it is going to fall. Say you find someone who is willing to let you borrow a share of stock A for a week for the premium of $1. You agree, and then immediately sell this share back to the market for $100. You now have $99. If the stock falls, as you hope it does, say to $90, you spend $90 to repurchase the share and return it. You now earned $9 on a short. Consider the opposite scenario: you short, but the price goes up. Again, borrowing a share of stock A for $1, trading at $100. You sell that share to the market and wait for the price to fall, so you can buy and return. But, suddenly the market learns that company A is insanely profitable in a previously unknown way, and the price of the stock skyrockets. At the end of the borrowing term, you are obligated to return a share of stock A to the person you borrowed from. How much will you have to pay to get it back? This is theoretically unlimited, depending on how high the market goes. If the market goes to $200, you have lost $101 on the short. If the market goes to $200,100 (and does not fall below this before the end of the borrowing term), you have lost $200,001 on the short. Now imagine you have borrowed a LOT of shares on high leverage (value of what you borrow exceeds what you actually have on hand to pay it back) and you can see how shorting and being wrong can wipe you out. Good point from svachalek[https://news.ycombinator.com/item?id=6690938 https://news.ycombinator.com/item?id=6690938] below: if the borrowed stock rises high enough, eventually the lender is going to margin call you.. http://www.investopedia.com/ask/answers/05/shortmarginrequirements.asp http://www.investopedia.com/ask/answers/05/shortmarginrequir...