"Lee explained that short selling is the process of selling stock you don't actually own. Your broker borrows shares from another investor and sells them on your behalf. You're betting the stock price will decline so that you can buy those shares back later at a lower price, returning them to the lender and pocketing the difference. The key risk, as Lee stressed, is that losses can be unlimited."
"A stock you shorted at $10 could rise to $30 or $50, leaving you exposed to potentially catastrophic losses. "When you're long, the worst you can do is go to zero," he said. "When you're short, there's no limit to how far it can go against you." Shorting also comes with hidden costs. If the company pays a dividend, the short seller must pay that dividend to the lender of the shares."
Short selling involves selling borrowed shares with the expectation of buying them back later at a lower price; brokers borrow shares from other investors and sell them on the seller's behalf. Losses on short positions are potentially unlimited because share prices can rise without bound, unlike long positions which can only fall to zero. Short sellers incur borrow costs and must pay any dividends to the share lender. Selling naked puts offers an alternative bearish exposure by collecting premium while agreeing to purchase shares at the strike price if assigned, but it requires margin approval and carries distinct risks. Heavy short interest can create squeeze risk.
Read at 24/7 Wall St.
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