Selling Short

While most individuals invest in the market when they believe a stock's price will go up, some sell short because they believe it will go down. To sell short, investors open a margin account, borrow shares from their broker and sell the shares on the market. When the stock price decreases to a satisfactory level, investors cover the short position by buying the shares back (also called 'buy to cover'). Their profit is the difference between the price at which they sold the borrowed shares and the price at which they repurchased the same number of shares in the market, plus the transaction costs and any additional fees.

The risks associated with selling short may be even greater than those associated with straightforward investing. If the stock price increases instead of decreases, you may end up paying much more to re-buy the shares so that you can return them to your broker than you realized by selling the shares. You may owe interest as well. There is a limited supply of shares available to short, and certain stocks may not be available to short.