A short-seller is an investor who speculates the price of a stock or other security will fall in value.
The strategy involves borrowing shares in order to sell them with the hopes of buying them back at a lower price in the future.
While short-selling can be profitable, the practice is not without risk: Gains from short selling are limited (a stock can only go to zero), but the losses don’t have a cap as there is no limit as to how high a stock’s price may climb.
Sometimes stocks with heavy short interest are subject to “short squeezes.” Such an event occurs when short-sellers are looking to cover their positions at the same time, sending the price sharply higher.
One of the most infamous short squeezes occurred in October 2008, when German automaker Porsche revealed it had amassed a 74 percent stake in Volkswagen’s voting shares.
The announcement caused short-sellers in Volkswagen’s stock to rush for the exits at the same time, driving its share price up by more than 200 percent on Oct. 27, 2008.
Short-selling has been loathed by many CEOs, including Tesla’s Elon Musk, who declared the practice “should be illegal.”