Short selling.

In plain English

Short selling is borrowing shares of a stock (from a broker, who borrows from another holder), selling them at the current market price, and hoping to buy them back later at a lower price to return them. The difference is the short seller's profit, minus interest on the borrowed shares. The asymmetry is brutal: the stock can only fall to zero (a 100% gain), but it can rise indefinitely (an unlimited loss). Short positions also require margin and can face forced buy-ins if the borrowed shares are recalled.

01Why it matters

Short selling is how some hedge funds and activist investors challenge what they see as overvalued or fraudulent companies. It is also how individual retail traders have famously lost everything (and more) when a short bet goes against them in a 'short squeeze.' The asymmetric loss profile is structural and not negotiable; no risk-management technique fully removes it.

02The math, step by step

In January 2021, short sellers had built large positions against GameStop on the thesis that the business was failing. Coordinated retail buying drove the stock from under $20 to over $400 in three weeks. Several hedge funds lost billions covering short positions at the highs; Melvin Capital lost about $7 billion and eventually wound down.

03What this is NOT

04Receipts

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