Short selling profits from a falling price, but the mechanism is a loan rather than a bet. That structure creates obligations and costs that a long position does not carry.
The share is borrowed before it can be sold
A short seller locates shares to borrow, typically from a broker's inventory or from another client's margin holdings, and sells them into the market.
The buyer receives real shares and full ownership, so the transaction is indistinguishable from any other purchase from their side.
The seller now owes shares rather than money, and must eventually buy them back to return to the lender, which is where the profit or loss is realised.
Borrowing carries a fee set by scarcity
The lender charges a borrow fee, quoted as an annualised rate against the value of the shares and accruing daily while the position is open.
Fees on widely held stocks are minimal because supply is plentiful. Where few shares are available to borrow, the rate can become the dominant cost of the trade.
The short seller also owes any dividends paid during the borrow, since the lender must be made whole for what they would have received.
Losses are unbounded in a way long positions are not
A share bought outright can fall to zero, so the maximum loss is what was invested and it is known in advance.
A short position loses as the price rises, and there is no ceiling on how far a price can rise, so the potential loss has no defined limit.
Because the position is held on margin, an adverse move can also trigger a margin call that forces closure at the worst possible moment.
Recalls and squeezes are structural, not incidental
The lender can demand the shares back at any time, which forces the short seller to buy in regardless of their view.
When many shorts are forced to buy simultaneously, the buying itself pushes the price up and triggers further forced closures.
That feedback loop is what a short squeeze consists of, and it is a consequence of the borrowing structure rather than of any manipulation.
Short interest is a published and imperfect signal
Exchanges publish short interest periodically, expressed as shares sold short and as a ratio to average daily volume.
High short interest indicates conviction against a stock, and simultaneously indicates a large pool of forced buyers if the price moves the other way.
The data is reported with a lag and does not distinguish outright bets from hedges attached to convertible bonds or options positions.