To profit from the decline in price of a security such as a stock or bond a strategy called short selling or shorting may be used. Normally in the stock market the overwhelming majority of investors go long on an investment. That is to say they buy a security with the anticipation of a rise in its price.

To make money from a declining stock a short seller can borrow the security and sell it immediately. If the price of the security actually does decrease then the short seller can buy the borrowed security back at a lower price and pocket the difference. For clarification consider the following example: 

Assume that shares in OPQ Company are currently being sold for $10 per share. Now short seller Mr. Green borrows 100 shares of OPQ and sells them immediately for a total of $1000. If the price of OPQ falls to $5 per share, Mr. Green would buy back 100 shares of OPQ for a total of $500. Then he would give the 100 shares back to the original owner and make $500 of profit. 

In another scenario if the shares of OPQ increase in price to a value of $20 per share, then the short seller would have to buy back the 100 shares for $2000 and absorb a loss of $1000.

Short selling is often considered to be a positive market force. An important point to consider is that an investor involved in short selling may be prone to a short squeeze.

BASIC STEPS IN SHORT SELLING

1-       You borrow shares, but since there is a general rule in the United States that one must only borrow money based on shares up to 50 percent of the shares value, one must deposit 50 percent of the shares value in cash with one's brokerage firm.

2-       You sell them and the proceeds are credited to your account at the brokerage firm.

3-       You must "close" the position by buying back the shares (called covering) - If the price drops, you make a profit. Otherwise you make a loss.

4-       You finally return the shares to the lender.