What describes short selling?

Short selling involves the act of selling a security that the seller does not own, with the expectation that the price will decline. This process typically involves borrowing the security from another party to sell it on the market. The goal is to buy back the same security later at a lower price, return the borrowed shares, and pocket the difference as profit. This strategy is based on the belief that market prices can decrease, allowing the seller to capitalize on falling stock values.

Understanding how short selling works is crucial in the context of market mechanics and investor strategies. It differs significantly from traditional investing approaches, where investors seek to buy low and sell high. Instead, short selling is more speculative and carries additional risks since the potential for loss is theoretically unlimited if the stock price instead increases significantly.