When you short sell a stock, you borrow shares from your investment firm because you think that the price of the stock is going to fall. You sell the borrowed shares at the current price and if the price drops, you make money by buying the shares back at the lower price and then returning them to your investment firm. But if the price rises, you’ll lose money if you have to buy back the shares at the higher price. You must have a short account to engage in short selling, which is a type of margin account.
Theoretically, there is no limit to how high the price of a stock could go – losses could be unlimited. This is the greatest risk of short selling.
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