How do investors profit from "short-selling" stocks?

Another way to make money on stocks for which the price is falling is called short selling (or going short). Short selling is a fairly straight forward concept: an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.

Short sellers are betting that the stock they sell will drop in price. If the price does drop after selling, the short seller buys it back at a lower price and returns it to the lender. The difference between the sell price and the buy price is the profit.

Please note: Just like borrowing funds will generate interest expense, borrowing stock to short will also result interest expenses. The interest varies depending on the supply and demand of that security on the particular trading day.

Investors who short the stock also face the risk that the stock will be forced to be bought back by the brokerage firms due to the fact that they are unable to continue borrowing that specific stock from the market and lend it to investors.