Short selling is betting that a stock will go down. You borrow shares from your broker, sell them at today's price, wait for the price to drop, buy them back cheaper, and return them. The difference is your profit. It is the opposite of the traditional "buy low, sell high" — here you sell high first, then buy low.
Example: You short 100 shares of XYZ at $50 (receiving $5,000). The stock drops to $30 — you buy back for $3,000 and pocket $2,000 profit. But if the stock rises to $80, you lose $3,000. The terrifying part? Your losses are theoretically unlimited — a stock can rise infinitely, but can only fall to zero.
The GameStop short squeeze of January 2021 showed what happens when short sellers get caught. Hedge funds had shorted over 140% of GameStop's shares. Reddit traders on r/WallStreetBets coordinated buying, sending the stock from $17 to $483 in weeks. Melvin Capital lost $6.8 billion. Short selling serves an important market function — it keeps overvalued stocks in check.