ELI5: shorting a stock

// eli5

What does it mean to short a stock?

Shorting a stock is like borrowing something you think will get cheaper, selling it right now, and then buying it back later at a lower price to return it [1][2]. Imagine borrowing your friend's toy that costs $10, selling it immediately for $10, waiting until the price drops to $6, buying it back, and returning it to your friend while keeping the $4 difference [3][4].

Why would someone do this?

People short stocks when they believe the stock price is going to fall [4][5]. Instead of making money when prices go up (like normal investing), short sellers make money when prices go down [3].

What's the catch?

The biggest problem is that stock prices can go up instead of down, meaning you'd have to buy it back at a higher price and lose money [2]. There's no limit to how high a stock can go, so you could theoretically lose unlimited money [1].

How does the borrowing work?

Your broker (the person who helps you invest) lends you the stock to sell, kind of like taking out a loan [1][2]. You have to eventually buy the stock back and return it to your broker [2].