Let’s say an investor found a company that they think is overvalued. They borrow 100 shares of stock in company A at a price of $10 per share for a total of $1,000 (plus any applicable brokerage fees).
In scenario A, the investor made a prediction that was spot-on and the price falls to $9 per share. Great! Now the investor can buy back 100 shares at a price of $9 for only $900, and the leftover $100 is the profit.
For example, say someone has 100 shares of stock in a company that deals in real estate and is classified as a real estate investment trust (REIT). The investor has researched the company and believes it has sound fundamentals, high-quality management, and will continue to grow.
The practice of short-selling is not without controversy. Shorting may have received a bad rap by being associated with the fear that shady investors will spread malicious rumors about a company in the hopes of influencing its share price.