A large number of investors make money on a decline in an individual stock or during a bear market, thanks to an advanced investing technique called “short selling.” In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Short selling is in fact the exact opposite of the normal process of investing by purchasing shares on margin (taking a long position) and selling them at a later time in the market. In case of short selling the investor first sells the security with the intent to later buy it back at a lower price. When an investor goes long on an investment, it means he has bought a stock believing its price will rise in the future. Conversely, when getting into the market by investing short, an investor is anticipating a decrease in share price.

Shorting stocks allows you to enter the market as a seller and profit when a stock declines. Short selling is the selling of a stock that the seller doesn't own. Your broker "borrows" the stock from someone else's margin/short account and sells it in the market for you. As long as you buy back the shares at a lower price, you will profit. To short stocks you must first establish a margin/short account with your broker. Because you are buying on margin, you must pay interest and follow the rules of margin trading. The shorter is responsible for paying the lender any dividends or rights declared over the course of the loan. The stock you wish to short must be available to borrow and you must maintain at least 50 percent or more of the stock's value in your account.

The primary reasons for shorting are to speculate and to hedge your investment. One danger of investing by short selling is the theoretical possibility of an unlimited loss. As opposed to a long or regular purchase of shares in the open market on which you can only lose the amount of money you originally invested, there is no maximum loss that a short seller can occur. This is, of course, due to a fact that there is no limit to how high a stock can go up in value. For instance, if you were to short a stock trading at $5.00 and, due to some unforeseen occurrence, the stock grows to the $100 level and keeps on climbing; you will at some point be forced to cover your short position by buying back the shares somewhere past the $100 level (costing you over 20 times the original short sale proceeds).

Short selling contributes to the market by providing liquidity, efficiency, and acting as a voice of reason in bull markets.