Function

Short selling is predominantly executed by experienced investors looking to get in and out of a stock quickly. There are more risks associated with this approach to investing and the casual investor should be wary.

Why

Traders who have done thorough due diligence and see it as an inevitability that a specific stock is headed down may deem it an appropriate risk in an attempt to make money quickly.

Example

Jane has done her research and feels that General Inc.'s stock will fall soon. She contacts her broker and "shorts" 50 shares at $50 a share. She has to have $2,500 in her account to cover it, plus the commission. When the stock dips to $30 a share, Jane opts to buy back the shares to return to the broker. Jane buys back the shares for $1,500, returns the original shares to the broker and pockets the $1,000 difference.

Positive Aspect

The reason most investors are not short sellers is because of the meticulous research that is behind every trade. Their time-intensive, diligent analytical work is often the first tip-off to other traders that certain companies are unhealthy.

Risks

The risk of short selling is that it's possible to lose more than the original investment. If the stock does not fall and rises instead, the investor is responsible for paying the broker the difference.

Source:

Investopedia: Questioning The Virtue Of A Short Sale