Most long-term investors attempt to make money in the stock market by identifying individual stocks or exchange-traded funds that they believe will rise in value over time. As the old adage goes, the recipe for successful investing is buying low and selling high. However, certain investors actually profit off bets that share prices will go down over time. These bets are called short sales. Short selling involves borrowing shares of a stock from a broker, selling them at market price, and then buying back the shares at a lower price on a later date. While short selling can be advantageous at times, there are plenty of reasons the average investor should think twice about short selling on a regular basis.
- Unlimited losses
When a typical investor buys shares of a stock, the absolute worst-case scenario is that the company goes bankrupt and the stock’s share price goes to zero. For the investor, that scenario means a 100 percent loss. At the same time, potential gains are unlimited because there is no cap on how high a stock’s share price can climb over time. However, due to the nature of short selling, that risk and reward skew is reversed. Potential gains for a short seller are capped…
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