Just as margin buyers are optimists, expecting
prices to go up,
short sellers
are pessimists, expecting prices
to go down. To profit from this anticipated drop as a short seller,
you borrow shares of a stock from your broker, sell — or
short — the shares, and pocket the money gained from the
sale.
If the price goes down — as you calculated
it would — you buy back shares at the lower price and return
the number of shares you borrowed to your broker. After you pay
interest and commissions, you expect to have made more on the
initial sale of the borrowed stock than it cost you to sell and
rebuy the shares.
The risks
The strategy can backfire, however, if the
stock price goes up rather than down, or even if the price is
stable for an extended period. Interest charges mount, and you
may decide to cover your short position by buying shares at a
higher price than you realized when you sold them. That will leave
you with a loss. And if the price continues to rise, your costs
— and potential losses — will mount.
