How does shorting a stock work?
The way short selling works is your stock broker owns a large amount of stock on behalf of you and his other clients. When you decide you want to short sell a stock, you borrow the shares from one of the broker’s other clients and then sell them on the open market. You are now responsible for making all of the dividend payments and take on the risk that the stock will increase, because at some point you will need to buy back the shares of stock and return them to the original owner. If you short sell a stock at $10, and the stock falls down to $5. You now can buy back the shares of stock at half the price. If you do this, you will zero out your position and can pocket your profits. However if the stock goes up to $40, you are now on the hook for 4 times as much money as you originally put in, because you will need to buy it back at return it to the original owner at 4 times the price. Because of this, short sellers face unlimited risk, and limited reward. The most you can ever gain is
