Betting on a decline takes a different path. In short selling, an investor borrows shares, sells them at the current price, and later aims to buy them back more cheaply to return to the lender. The difference, after costs, is the profit.

The mechanics introduce extra risks. If the price rises instead of falls, losses can grow quickly because there is no cap on how high a stock can climb. Lenders may also demand the return of borrowed shares, forcing the position to close at an unfavorable time.

Short selling can add liquidity and help price discovery, especially when it exposes overvalued or weak companies. It also attracts scrutiny during market stress, when regulators may impose temporary restrictions.

Key elements

• Borrowing shares before selling them
• Profit if prices fall, loss if they rise
• Margin requirements and borrowing costs
• Potential for forced buybacks