When you invest money in a stock, you want the value of that stock to increase. Once it does and you decide to sell that stock, you’ve made money (or a gain).
Yet not all stocks make gains on the market. Many stocks lose value over time due to lack of demand, poor business decisions, and other factors that impact performance. If you have faith in that stock’s future, you can invest in it with the hopes that it increases in value at a later date. If you don’t have faith in that stock, you can bet against it, or “short” it.
Unlike traditional investing (or “going long”), short selling lets investors make gains when a stock decreases. While the idea of making money through smart predictions of a stock’s poor performance sounds enticing, it’s not without risks. In fact, short selling is one of the riskiest investments you can make on the stock market.
Wall Street Survivor put together this helpful video to show how short selling works. Sure, you might find yourself enticed by the thought of betting against a company (like $SNAP, for instance). Yet once you learn the major financial risks, chances are you’ll want to stick to regular ol’ investing.
When you invest in a stock the traditional way (by “going long”), you risk losing your original investment. When you short a stock, you risk losing much more. If the stock your shorting increases instead of decreases, then you’re on the hook for the gains.
Shorting stocks is only for more advanced investors and traders. If you want a lower risk and safer way to grow your money, you’ll want to avoid short selling. Otherwise, you could end up losing more than you started with.