Short position: profiting from declines, and the risks

A short is a trade opened in expectation of a price decline. It is most often carried out on derivatives contracts or by borrowing the asset and selling it with the intent to buy it back cheaper. If the price falls, you buy back lower, and the difference is your profit. If it rises, you take a loss.

The asymmetry matters: price can fall to zero at most, but it can rise with no theoretical upper limit, so a loss on a short has no theoretical cap. That is why a stop loss and control of leverage are so important. A short can also serve as a hedge for a portfolio. It is not “better” than a long: it is a different direction of a bet, with its own costs, such as funding fees.