The Principle of Shorting
While longs buy stock today to sell sometime in the future (hopefully at gains), Shorters borrow stock and sell it today. This means at a later time they need to give the stock back so to do this they must buy back an equal amount (hopefully at a reduced price). The price difference is their profit. Shorts make money when the SP goes down while longs make money while the SP goes up. The two exta risks shorters have are:
- If the original owner of the stock wants to sell their stock the shorter must cover,
- (more importantly) Since a stock can in theory go up unlimited, there is no maximum amount a short position can lose. A long can only lose the amount of money it cost to buy the stock.
