Short Selling

Broker borrows a share, sells the share high, repurchases share at lower price ($) and returns it.

Short selling stock is the practice by which a broker borrows stock with the hope that the price of that stock will fall so that he or she can sell at a high price, (re)purchase at a lower price, and pocket the difference.

Hypothetically, let's say a trader named Joe firmly believed that Apple, Inc. was about to experience a large drop in share price. To short a single share of Apple stock, Joe would do the following:

1). Borrow a share of APPL from his portfolio, a client portfolio, or a fellow broker

2). Sell the share at the highest a price they can find before a drop (say 1 share of AAPL at current $157.76)

3). Wait for the price to fall (say APPL falls to $102.76), then purchase one share at this lower price

4). Subtract the higher price from the lower price (less fees) and return the borrowed share. 

Joe earns a cool $53 bucks from this scheme as he sold at $157.76 and bought back for just $102.76. After fees of $2.00 this is $157.76 - $102.76 -$2.00 == $53.00.

While the idea of selling something short of true value is often associated with the nefarious case of a stock "short" like this, oftentimes it is a necessity. The market always needs people on both the long end (owners/buyers) and the short end (renters/sellers) for it to work properly.

This is why banks who are on the hook with a property that they cannot sell will ultimately agree to a "short sale" (selling the home for below its fair market value) to recoup at least some of their losses.

A combination of consumer preferences and financial factors determine whether to go long or short on any kind of investment or large financial transaction.

Short selling doesn't always work in the sellers favor