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According to the Yahoo! Finance Glossary, shorting a stock involves "selling a security that the seller does not own but is committed to repurchasing eventually. It is used to capitalize on an expected decline in the security's price." In other words, someone who shorts a stock borrows shares from a brokerage house in order to sell them in the hope that he or she can buy them later (or cover) at a lower price, return the shares to their owner, and profit on the difference. The key provision in this agreement is that a short seller has to buy back the stock. If the stock suddenly shoots upward, you're paying the difference. So you're betting on failure. The Motley Fool
demonstrates the ups and downs of shorting with a wonderfully appropriate scenario involving shares in a gondola manufacturing company. If you're thinking about getting into short selling, Investopedia advises that the practice has "many unique risks and pitfalls." It's the opposite of going long -- buying a stock and forgetting about it. Shorting is akin to putting yourself in a hole, and digging your way out.
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