It can also stoke fears of a market decline, and increases the market’s volatility. The practice, then, is a double-edge sword and requires careful strategy, research and sober decision making.

Short selling is a trading strategy that, when done correctly, can turn a profit even when the market is declining. It involves borrowing a security and selling it on the open market, with the goal of buying it back later at a lower price. The premise behind short selling is that the price of a security or index will decline in value, allowing the investor to buy back the security at a much lower price than it was originally sold.

Despite the potential for high returns, short selling is a highly risky strategy with potentially disastrous losses if done incorrectly. Not only could the price of the security rise and create infinite losses, but investors must also maintain a set amount of equity in their account, or face a “margin call.”

When investing in the stock market, an investor always faces some amount of risk. Short selling is a high risk/high reward strategy, but requires careful evaluation and strategy in order to succeed. Because it increases the market’s volatility, investors must be knowledgeable about the company and anticipate upcoming news that may affect the security’s price. Another important factor to consider is the cost of borrowing the security.

In a nutshell, short selling is a valuable but risky trading strategy used to generate profits in a market decline. It requires considerable knowledge, research and risk management to access the potential profits while avoiding crippling losses.