Short Selling

Short selling is a way to profit from a declining stock. Here's how it works: You borrow shares from your broker, immediately sell them at the current price, and hope to buy them back later at a lower price. The difference (minus borrowing costs) is your profit. If the stock rises instead, your losses can be theoretically unlimited.

Short selling is controversial but serves important market functions: it provides liquidity, incorporates negative information into prices faster, and can expose fraud (as Hindenburg Research and Muddy Waters do). The risk of a 'short squeeze' — when a heavily shorted stock rises rapidly, forcing short sellers to buy back at a loss — can be extreme.

Example: Michael Burry's famous short against the housing market via credit default swaps in 2007–2008 earned his fund hundreds of millions. GameStop's 2021 short squeeze showed the other side: short sellers collectively lost over $6 billion in January 2021 as retail investors coordinated buying on Reddit.

Short positions are NOT disclosed in 13F filings, which is one important limitation of BMInsider's Smart Money Tracker — you see what managers own long, but not what they're betting against.