How Does Short Selling Work? - TheStreet Definition

Dictionary of Financial Terms

Short selling is pretty much backwards of investing. Instead of buying a stock with the object of selling it at a higher price, you borrow a stock (through your broker) and immediately sell it. If and when the stock falls to your objective, you then buy it and return the shares to their rightful owner (probably, through your broker), to the stock loan department of the brokerage firm.

But danger: While there's no limit to shorting a stock -- other than the limits on your own ability to tolerate a loss -- there's always the possibility that the owners of the stock could ask that they be returned immediately. When they're orchestrated en masse, these so-called "buy-ins" are considered a short squeeze and they cause the stock's price to rapidly rise. The risk can be somewhat tempered by including a loss limit or stop-buy order, which would cause your broker to automatically sell the stock if it reaches a certain level. You can also use options-related hedging techniques, but first you had better understand options and their risks.

Definitions of Financial Terms