Related Terms • Arbitrage • Bear Market

Definition: When someone shorts a stock [sometimes called "selling short"], they borrow shares of a company from an investor and sell those borrowed shares at the current market price.  The hope is that the stock price will fall so the short seller can repurchase the stock at a lower price and pay back the person they borrowed from. 

Example: You decide to short 10 shares of a stock that costs $50.  You enter a short order with your broker, who borrows the stock from another one of his or her clients.  Once you have the borrowed shares, you sell them.  Since you didn't own those shares, you are going to have to pay the owner back in a short amount of time.  The stock price falls to $40, so you purchase the shares.  This costs you $400 [10 shares x $40 per share] and give them back to the original owner.  Since you sold their shares for $50 earlier, you made $500 [10 shares you borrowed x $50 per share].  Your profit is the difference between the two, in this case, $100 [because $500 - $400 = $100].