So far we’ve assumed you buy a stock and profit if it rises. But some investors do the reverse, and others borrow to magnify their bets. Both use leverage, and both can hurt far more than ordinary investing — which is why they belong at the advanced level.
Short selling: betting on the way down
To short a stock, you borrow shares, sell them now, and hope to rebuy them later at a lower price — pocketing the difference. You’re betting the price falls.
The asymmetry is brutal. When you own a stock, the most you can lose is what you paid; the upside is unlimited. Shorting flips this. Your profit is capped (a stock can only fall to zero), but your loss is theoretically unlimited, because a stock can rise without limit. A surging price can also trigger a short squeeze, where shorts scramble to buy back and drive the price even higher.
Buying on margin
Margin is borrowing from your broker to buy more than your cash allows. It amplifies both directions: a 10% gain becomes a 20% gain with 2× leverage — and a 10% loss becomes a 20% loss. If losses mount, the broker issues a margin call, demanding more cash or selling your position at the worst possible moment.
Why caution
Leverage doesn’t just raise returns; it raises the odds of being wiped out before your thesis plays out. Many disciplined investors avoid both shorting and margin entirely. If you ever use them, size them tiny and know exactly how much you can lose.
Case study: the GameStop short squeeze
In January 2021, GameStop became the textbook example of short selling’s unlimited-loss danger. The struggling retailer was heavily shorted — at one point more shares were sold short than actually existed in free float. A wave of retail buyers (rallying on social media) drove the price up, and as it climbed, short sellers faced mounting losses with no cap. To limit the damage they had to buy shares back — which pushed the price even higher, forcing more shorts to cover, in a self-reinforcing short squeeze.
The stock rocketed from a few dollars to an intraday peak around $120 (split-adjusted) in weeks. Some hedge funds lost billions, and at least one needed a multi-billion-dollar rescue. The price later fell back hard — squeezes are temporary — but the shorts who were forced out at the top didn’t get to wait for that.
It’s the lesson made vivid: when you’re short, a rising price can compound against you without limit, and a crowded short is dangerous precisely because everyone must buy back at once.
The takeaway
Short selling profits when a stock falls but exposes you to unlimited loss; margin magnifies gains and losses and can force a sale at the worst time. Both are powerful, both are dangerous, and neither is needed to invest well. (This is education, not investment advice — and these techniques carry serious risk.)