Short Selling is when investors borrow a number of shares of a stock, sell it in the stock market hoping that the price drops so they can buy it back later (cover the short) at a cheaper price and keep the difference for a profit.
Short selling can be extremely risky as the potential losses are limitless but the rewards are limited. "Shorts" (investors who short sell stocks)lose money when the stock price rises and make money when the stock price decreases. Theoretically a stock is unlimited in how high its price can rise therefore the losses are unlimited. Since a stock price cannot fall below 0 the most a "short" can make when short selling are the proceeds when he or she initially sold the borrowed stock. If prices rise dramatically one could lose a substantial amount of money since he or she would be contractually obligated to repurchase the stock no matter what the price.
John thought that XYZ's stock was going to lose value. XYZ's stock was priced at $20 and John expected the price to fall to $10. John borrowed 1000 shares of XYZ's stock and sold it in the stock market at the market value of $20 per share totaling $20,000. One month later the price fell to $10 as John predicted and John repurchase 1000 shares for $10,000 and returned them to the original owner that he borrowed them from. John's total profit was $10,000. This time John made a good decision, however if the price rose to $30 per share John would have had to spend $30,000 to repurchase 1,000 shares therefore he would have lost $10,000.
