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Short Selling

Short selling, selling short or "shorting" is a way to profit from the falling price of the underlying asset.  This is accomplished by selling, or borrowing shares or contracts of an asset that is not currently owned.  Since the asset is sold, an account will be credited with the current selling price.  However, the short seller must return the borrowed asset at a later date.  This is known as covering the short position.

For the short seller to profit, ideally the short position is covered when the price of the underlying asset is at a price that is less than what it was sold for.  The short seller can buy the asset back, thereby becoming flat and pocket the difference.

Short selling is considered risky by most for two reasons.  First, it is possible to lose more than 100% of your account short selling.  Since it is not possible for an asset price to go below 0, the long position taker cannot lose more than 100% of the initial investment.  However, it is possible for any asset to more than double, therefore, making it possible for a short seller to lose more than 100% of the initial investment.

The second problem is that since an asset is borrowed from the broker, the broker typically charges interest on the borrowed asset.  Not only will the position have to move in the right direction, but it will have to move faster than the interest rate charged by the broker to be profitable.