The object of short selling is to make a profit with the stock price going down. When you short sell, you are loaned the shares of the stock that you are selling (by your brokerage dealer), and you are obligated to buy them back at some point in the future. This means there is potentially a lot of risk involved because once you sell the stock, the share price could sky rocket infinitely. If the stock price rises too high, brokerages protect themselves (and you) by issuing you a margin call, meaning you have to bring money into the account to offset the increased debt you owe from having to buy the stock back at a higher price.

An example of a short sale: Let’s say GOOG is trading at $500 a share and you think the stock price is going to go down. You open your position by selling short 100 shares of GOOG at $500, and you account is entered with a credit of $50,000. The stock price of GOOG then goes down to $400 next week. You close your position by buying back the 100 shares of GOOG at $400 a share for a total of $40,000. You are left with a profit of $10,000. Not bad right? On the other hand, if the stock price of GOOG went up to $600 a share you would be in the hole $10,000. Remember, your downside is unlimited with short sales, while your upside can only increase until the stock price reaches $0.