I just cannot, for the life of me, understand how you make a profit by it.
In: Economics
Short selling is selling a share of a stock you don’t currently own with the promise that you’re going to buy it back later. Typically with stocks, you buy them now, hope the price goes up, and then you sell it in the future when it’s worth more money. With short selling, you borrow shares from someone who actually owns them, they charge you a small amount of interest for every day you borrow them, and you sell them immediately, getting the value of the shares at that moment in time. Now you’re on the hook to return those shares you borrowed. Hopefully, in the future those shares are worth less than you paid for them, and when you buy the same number of shares back to return to the person you borrowed them from, you get to pocket the difference.
The reason this is so risky though is that buying shares normally, the absolute worst you can ever do is lose 100% of your money invested. With short selling, there’s no actual limit to how high the price can go, meaning there’s no limit to how much money you can lose. You can borrow $1000 worth of stocks, sell them, make your $1000 and then the share price goes through the roof and you’re forced to spend $50000 to return the shares back to who you borrowed them from. This is essentially what happened with Gamestop back in 2021, and it’s a pretty quick way to bankrupt your hedge fund if you make a bad bet on a short sell
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