Term: Short

A short (or "short position") means you're betting that a stock's price will fall, and you're set up to profit if it does. It's the opposite of the more familiar approach of buying a stock hoping it goes up.

Here's how it works mechanically: you don't own the shares you're selling. Instead, your broker lends them to you from its own inventory or another client's account, and you sell those borrowed shares on the open market at the current price. Later, you buy the same number of shares back — this is called "covering" — and return them to whoever lent them to you. If the price dropped between your sale and your buyback, you pocket the difference. If it rose instead, you lose money, because you have to pay more to buy back the shares than you received for selling them.

The nuance that trips up beginners is the risk profile. When you buy a stock, the most you can lose is what you paid for it — the price can't go below zero. But when you're short, there's no ceiling on how high a stock can climb, which means your potential loss is theoretical unlimited. This is also why brokers charge a borrowing fee for the shares (sometimes small, sometimes very large if the stock is hard to find or in high demand) and why they can force you to buy back shares at a bad time if the stock becomes too expensive to keep borrowing, or if you don't have enough margin (borrowed buying power) in your account to cover potential losses.

Shorting also usually requires a margin account, meaning you're borrowing not just shares but effectively trading with leverage, since your broker is fronting you the position rather than you paying cash for something you own.