Normally investing works like this: You buy a stock cheaply, wait for it to rise, and sell at a higher price. Simple and straightforward.
Short selling is the opposite. You sell a stock you do not own, wait for it to fall, and buy it back cheaper. The difference is your profit.
Here is the most important thing you must understand about short selling: The loss is theoretically unlimited.
When you buy a stock you can lose at most what you paid — the stock cannot fall below zero. But when you short, the stock can rise indefinitely — and with every step upward you lose more.
A short squeeze is one of the most dramatic events that can happen in the stock market.
The most famous recent example: In 2021, private investors on Reddit's WallStreetBets forum massively bought GameStop shares to punish hedge funds that had shorted the stock. The price rose from $20 to over $480 in a few weeks. Many hedge funds lost billions.