What is shorting?

A lot of my friends who are new investors are asking what is "shorting", so here it is, as best I can explain it.

When you short, you borrow the shares from your broker. Your broker will get them from it's customers who are holding shares long term. You can only short specific companies that your broker can definitively borrow. Anyway, you sell these on the open market. You don't get any cash yet, because it is held as collateral for the shares you borrow. Later on, if the price falls you can buy them back, and you get to pocket the difference.

There's no time limit, but shorting for extended periods means margin interest is eating further and further into your theoretical profits (Or putting you further into the hole if you made a bad bet.) What's more, if the company pays a dividend, you have to pay this out of your pocket, since you have created "phantom shares" that don't actually exist.

Yes, your broker will make a margin call if the margin interest or a sudden rise in the stocks price drives your used margin past your limit. This often puts you in what's known as a "short squeeze" - you and everyone else who shorted have to cover their positions at once, which quickly drives up the price even further, worsening the situation.

A more general danger is that stocks as a whole have a tendency to rise in value over time - when you short you're betting against the general trend. I know the trend is downwards right now, but it will reverse at some point, and if you're new, you are least likely to have a grasp on when that could happen.

If you're new I strongly recommend you not try it till you've had a few years experience.