Fundamentals

• Investors who buy "long" profit when a stocks increases in price because the investor plans to hold the shares until they are sold. Selling short bets that a stocks price will decrease and thus generate a profit. The short investor does not plan to hold the shares, but plans to sell them quickly and replace them later with shares bought at a lower price.
  
  

Effects

• Miss Investor sells short 100 shares of stock "A" at $100 each. Miss Investor's broker loans her the shares and she sells them on the market at that price. Stock "A" drops to $85, Miss Investor buys 100 shares at $85 and repays her broker. Miss Investor realizes a profit of $15 per share or $1500.
  
  

Warning

• Selling short is risky. If the stock increases in price instead of decreases, the investor faces unlimited loss potential (there is no limit to a stocks potential rise).
  
  

Considerations

• An investor can protect himself against unlimited losses by placing a "buy stop" order Good Til Canceled. This, in effect, buys replacement shares to cover the short position at a predetermined price, limiting the potential loss exposure that continued price gains would pose.
  
  

SEC Rules

• From 1928 to 2007, the SEC allowed investors to short sell only on an uptick or a zero-plus tick. The rule was intended to prevent investors from shorting a stock that was already dropping, artificially driving its price lower to make a profit. The rule was abandoned in 2007, but the SEC proposed replacing it in 2009 after the markets in America crashed.