What does it mean to "short sell" a stock?

To "short sell" a stock means selling borrowed shares with the intention of buying them back at a lower price. In this strategy, an investor borrows shares from a broker and sells them on the open market, anticipating that the price of the stock will decline. If the price drops as expected, the investor can then purchase the shares back at this lower price, return the borrowed shares to the broker, and pocket the difference as profit.

This practice is predicated on the belief that the stock value will decrease, allowing the short seller to benefit from a downward price movement. It's important to note that short selling carries significant risk, as there is the potential for unlimited losses if the stock price rises instead of falls. Investors must be vigilant, as buying back borrowed shares at a higher price can result in substantial financial loss. This strategy differs fundamentally from long investing, where a person buys stocks with the expectation that they will increase in value over time.