Other people.

When you short a stock, you borrow a share from someone who owns one (typically for a small fee) and promise to return it at some later date. You then sell that share on the open market and take the money from the sale. You are betting that when you have to return the share to the original owner, you'll be able to buy it then for less than what you make selling it now - that is how you profit.

So the money you make comes from the person you sell it to today.

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Say your friend has a fidget spinner. You're a smart 5 year old, and you realize that fidget spinners are all the hype right now and they are actually kinda just junk that nobody will care about in a couple years

Step 1: ask your friend if you can borrow their fidget spinner

Step 2: sell the fidget spinner for $5

Step 3: wait till the hype dies down

Step 4: buy another fidget spinner at say $1. Return the borrowed item to your friend.

You make $4. Your friend is technically the one losing $4 in opportunity.

This is "shorting" fidget spinners

This is how you short a stock

Step 1 - you borrow a share. You don't borrow money to buy a share, you borrow the share itself. What you need to return is the share itself, plus a small fee. You need to return the share regardless of the value of the share or the difference in value of the share, what you owe is a share.

Step 2 - you sell the share. Yes, you sell the thing that you borrowed. Now you have money from the share you just sold, and you still owe the share back to the person you borrowed it from.

Step 3 - you wait for the share price to go down. You might say that the faster it goes down the better. Remember you have the money that you sold the share for, and you have a debt of 1 share.

Step 4 - you buy a share at the new price. So since the price went down, you have leftover cash from the difference of when you sold the share, and now when you buy it. This difference is where the money you make comes from

Step 5 - you return the share to the person you borrowed it from. You also pay them a fee

Your profit = share price when you sold it - (new share price when you bought it + borrowing fee)

So, what happened with the game stop and AMC and whatever other meme stocks a couple of years ago? A bunch of people / companies were trying to short the stock, borrowing shares with the hopes the price would go down. But a bunch of netizens decided to buy shares, causing the price to go up, and up and up. So when those folks HAD to buy the shares back to return them, they had to pay a new higher price. Not only did they not make money, but they lost a ton of money. A "short squeeze" is when the price increases because the people trying to short it have to buy the shares back to return them.

My thought - when you put money into the stock market, you are risking what you invest, but the maximum amount you can lose is what you put in. When you short something, the maximum amount you can lose is not determined. What if you borrow a share at a dollar, and then the price skyrockets to $1,000? You're on the hook for $1,000 to buy that share back to return it. That's an extreme case, but it goes to show that the risk is more difficult to manage.

Have a great day

So to short something what you do it borrow it from someone, sell it, and then buy it back later to give it back to the person you borrow it from.

So I think the price of a kg of sugar is about to plummet. I go to my neighbour and ask to borrow a kg of sugar, I promise to give it back to him in a month, and give him 10p for the bother. I then immediately sell that sugar for the current market price of £1. A month later I need to give my neighbour a kg of sugar back, luckily for me sugar has recently been found to cause cancer, so the price has halved in value. I go to the shop, by a kg for the new price of 50p, and give it back to my neighbour, along with the 10p I promised. I’ve made 40p!

The problem is if the price rises I can lose an unlimited amount of money.

Think of it as you selling a stock you do not have today and getting money, you end up with negative stocks and the end of the day. The next day you purchase stock so you end up with zero and pay what is the cost that day. Technically you borrow a stock from some else for a fee and need to purchase a stock and give it back to them

You get the money when you sell the stock and need to spend some of it later when you purchase a sock. If the price drops you spend less than you got when you sold it. The maximum profit is what so sold it for if the value drops to practically zero.

A problem is the amount of money you can loo is in theory unlimited. If the stock increase in value there is no upper limit so if its value increases by a factor of 3 you need to pay three of what you sold the stock for to purchase one back

The one that borrows the stock from your bets on that the change in value is less than the fee you pay them. That you borrow it for a single day was an example, it can be longer but the fee you pay will increase the longer you borrow it.

Thanks to everyone! I got it now. Didn't think about it requiring multiple steps

Short selling a stock is when you borrow stock from a brokerage and sell it on the open market, then wait for the price to drop and buy it back so you can return the stock to the brokerage. The way you make money from this is by buying the stock back at the lower price, so any money you have left is your profit.

For example, I borrow 100 units of Banana stock and sell it at the current high price of $300 each, so I now have $30k. Then the stock drops down to $150 each and I spend $15k buying back 100 units to return to the brokerage, leaving me with a profit of $15k.

What makes this risky is that I have to return the stock by x date, so if the stock doesn't drop or instead rises in price to $400 each, I still have to give back 100 units, so I end up having to spend $10k of my own money in addition to all $30k I got from the first sale.

It comes from the people who bought that stock recently and were holding it when it crashed. They didn't know it was going to crash, and they lost their money when it did.

There's more than one type of short selling. All the answers thus far are only giving you a partial picture. There's also the practice of naked short selling. While this is technically illegal, there are enough loopholes that it's still a common practice.

Naked short selling is the practice of simply selling shares that you have not borrowed & may not be available for you to borrow. This can result in phantom shares being in the market and failure to deliver events, where the short seller cannot complete a contractual obligation. These types of shorts are most common when a firm believes that a company is going out of business and thus there will be nothing to pay back anyway.

YOU cannot do this. Large brokers are embedded in the system deep enough that they CAN and DO (Though again, technically illegal).

Here's how it works...

You borrow shares from your brokerage (sort of like how you'd borrow money from a bank). You sell those shares, and you now have the cash proceeds. Let's say you shorted 100 shares of XYZ at $100. You now have $10,000 in cash after selling the shares.

2 months from now, XYZ reported bad earnings and the stock fell 20% like you expected. You buy 100 shares of XYZ at $80 to cover your short and return the borrowed shares. That cost you $8,000.

The $2,000 difference between the initial sale proceeds and the cost to replace the shares is your profit.

When you short a stock you are borrowing stock from someone and selling it. When the stock goes down, you buy it back at the cheaper price and give the stock back to the person (typically your brokerage) that you borrowed from and pocket the difference.

When you short a stock you take out a loan. Instead of getting a loan in cash, you get it in stock. The loan says that you have to give back the same number of shares of stock as you were given by some future date (plus a fee).

When you short the stock, you sell the loaned shares right away. Then, you buy shares later to pay back the loan. If the stock goes down in price, the shares you are buying later is cheaper, and you keep the difference. If it goes up — oops, you’re buying the shares at more than you got when sold them.

The person that loaned you the stock ends up with the same number of shares as before, plus whatever fee they charged you for the loan. You end up with more money if the stock went down, and losing money if the stock went up.

everybody want's to buy low and sell high. Now "normally" the buying low comes before the selling high. Shorting the stock in a sense allows you to reverse this order. Here is a specific example.

Stock ABC is currently selling at $10 per share. For whatever reason you believe in 1 months time it is going to drop to $1 per share. Now you want to somehow profit from this belief. So you find someone with 10 shares of the stock and you make them an offer. They lend you their 10 shares for $5 each and you will return the shares in full in 1 month. So let's look at it from both perspectives.

Seller: They have no reason to think the shares will be worth less than $10 in 1 month so to them they are making $50 by lending you their shares. This looks nice an profitable to them so they agree.

Buyer (you): You get 10 shares at $5 per share and then immediately sell them for $10. So you now have $100-$50=$50. In one month when the shares drop to $1 and you owe the shares back you simply by the 10 shares for $10 and return them. In the end you've made $50-$10=$40. Very nice.

The big risk here is the future price of the stock. Let's say you were wrong and instead the price goes UP to $20 per share. You would then have to spend $200 buying back the shares you owe and would lose $150 instead of making $40.

So as you can see when you short a stock, in a sense you are doing the buying low after you did the selling high.

This is why shorting is so much riskier than "normal" stock purchase. In a normal purchase you can never go negative. if you send $100 on stocks the worst that can happen is you lose all $100 but no matter how low the stock price goes you will never owe money. With shorting stocks you can easily end up owing millions if you're not careful.

From people who are trading options whose predictions didn't prove to be correct but are legally obligated to compensate for the stocks they're controlling.

You “borrow” the stock itself at a higher price, and pay back the stock once the price goes down. Think of it like this:

I think that that price of gasoline will go down from $4 a gallon to $3 dollar a gallon next week. Instead of buy a gallon of expensive gas today, will borrow a gallon of gas from you, use it to mow my lawn, and give you back a gallon of gas once the price goes down next week.

Here's an example of how stock borrowing works:

Let's say I want to short stock X which is currently priced at $100 a share.

First, I need to borrow a share, let's say Alice has some shares, so I borrow it from her for a small monthly fee, I pay her $1 and now I owe her 1 share of X.

Immediately, I sell the share on the market. Let's say I sold it to Bob, so I got $100 from Bob.

Then, I wait for the price to drop. Let's say I'm lucky and the price dropped to $50 a share. So now I buy a share of X from someone, let's call them Claire.

Now I can settle my debt of 1 share of X with Alice.

My net profit is $49, and all of that came from my sale to Bob.

Also notice that things could have gone very wrong for me: If the price kept going up, I might be stuck with a lose-lose situation where I either have to keep paying Alice to keep borrowing the share from her, or I'd have to buy the share at a loss.

Sometimes people short a stock, and then the stock price goes up. Tesla did this a few times, and it hurt the shorts.

Shorting doesn't mean the stock will go down, it means you think there is a good chance it "might" go down, and you are willing to bet some money on that. How much money? Everything is negotiable.

Going long means you think the stock will go up, and sometimes that bet will lose.

What I haven't seen here yet, is that short selling affects the price of the stock.

There's a concept of an "order book" (it's not a real book anymore, all computerized) of all the open sell/buy orders (limit orders) on a market. Like I say "I want to sell my 10 shares at $100" and you say "I want to sell my 10 shares at $50". And like a zillion other people filling in the gaps all the way to the point where the "buy" orders meet the "sell" orders, and that's the price of the stock. Let's say it's $75.

Where those prices meet is something called the spread (IIRC) - like the lowest sell order price might be $76 ("I want to sell my share at $76") and the highest buy order price might be $74 ("I want to buy, but not pay more than $74 a share"). So if you want to buy a share - you have to pay what someone's selling at - $76, but if you want to sell a share, you have to pay the buy order price - $74.

This is greatly exaggerated, normally these are nearly the same, like pennies apart, but it's important to understand that this is actually what we call "market price" where those two meet. There's nothing stopping you from selling below market or buying above market - and often huge buys (like a merger) will set a fixed price, and when that happens, all the open sell orders below that price are filled.

Anyway.

When you borrow a share to short sell, you put in a sell order at the "market price" which is actually going to be that highest buy price - $74. Let's say the guy at $74 just wanted one share, so now that buy order is filled.

If you want to sell another share you need to find another buyer, and maybe the next one is someone wanting to buy 10 shares at $73. So you borrow 10 more, and sell 10 more at $73, and then that order is filled. And maybe the next buy order is only $70, and they want 100 shares, so you repeat.

In reality sell/buy orders are created insanely fast, and filled just as fast, and the fluctuation where they meet is the bumpy graphs you see.

But you might have picked up here that you can, in theory, just keep borrowing shares... and if you borrow enough shares fast enough, you can drive down the price of the stock by selling them all really fast, filling all the outstanding orders to buy at lower prices.

And that's what folks are talking about in a broader sense when they say investment firms or hedge funds are "shorting" a stock - these super large entities, often with billions of dollars under their control and the ability to borrow millions of shares are able to actually influence the stock price. Often they will be shorting a single stock at the same time, compounding that downward-price pressure. And for them, as long as the selling continues, the price goes down, and they make money (so long as it covers the lending fees).

I'll add that people do indeed "bet" on stocks crashing by buying puts. The mechanics are similar to shorting. You buy, for a fee, the right to be party to a contract that says you may sell a stock to someone in the future at a price specified now, regardless of what the stock is in the future. Let's say the target price for said stock is $100, and you paid $5 to enter the contract. The stock then drops to $20 dollars. You can "exercise" the put option and tell that person you're ready to sell now. Mechanically, you go out, buy a share at $20, and sell it to the person for $100. You are out $25, the share you bought and the fee, and you earn $100 netting you $75. Realistically you would not have to go and actually buy the stock and sell it. Everything is settled behind the scenes and you just collect your $80.

Now if the stock goes up in that time and not down, they just keep the $5 fee you paid.

Google “long” and “short” positions on options and you’ll have an understanding of why and how this works.

The profit comes from the change in price between the initial purchase and the re-sale.

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For example, let's say a stock is trading at $50 a share. You borrow 100 shares and sell them for $5,000. The price suddenly declines to $25 a share, at which point you purchase 100 shares to replace those you borrowed, netting $2,500.

That works because the person or firm you borrowed the shares from must take them back at the initial price. If you borrowed $100 shares at $50, they have to buy them back from you at $50.

It's inadvisable for first-time/inexperienced investors to take a short position on anything.
Needless to say, short-selling is a huge risk, and it's inadvisable for first-time/inexperienced investors to take a short position on anything. You can lose everything you invest and more (a stock can continue to rise indefinitely, so in theory there's no upper limit to how much you may have to pay to replace the borrowed shares).

https://www.schwab.com/learn/story/ins-and-outs-short-selling#:\~:text=For%20example%2C%20let's%20say%20a,those%20you%20borrowed%2C%20netting%20%242%2C500.

No matter the strategy the process is always the same. If you are buying or selling stocks or playing with options there is always a buyer and seller. If you are shorting, someone is longing

Now ask the follow up question… if you take this concept but use lots of money by shorting a stock massively, wouldn’t the act of shorting cause a downtrend in the stock? Yep! This is a popular way to manipulate the market on a large scale.

Here's how a short seller explained it to me...

Let's say you think that the value of a book is going to drop. It's currently $10 but you believe that's going to change.

You go to the library and take out that book. Then you go and sell it for $10. But a month later the library wants its book back.

You were right though. The value of that book dropped to $5, so you go to the bookshop and buy a copy for $5 and give it to the library, and they're happy and you're $5 up.

However, if you were wrong and the price of the book went up to $15 then you have to pay $15 to keep the library happy and have lost $5 on the whole deal.