In the context of investing, what does short selling mean?

Short selling refers specifically to the strategy of selling securities that an investor does not own, borrowing them instead with the intention of buying them back later at a lower price. This strategy is predicated on the belief that the price of the security will decline, allowing the investor to repurchase the securities at a lesser value, return them to the lender, and pocket the difference as profit.

The practice involves several steps: first, the investor borrows shares from a broker and sells them on the market. If the price drops as anticipated, the investor buys back the shares at this lower price to return them to the broker. If successful, the investor benefits from the price difference. This process also involves substantial risk, as if the price rises instead, the potential losses could be significant, leading to a "short squeeze" where investors are forced to buy back at higher prices.

Short selling is distinct from other investment activities, such as taking long positions in anticipation of price increases, investing in derivatives like options and futures, or engaging in risk hedging, which aim primarily at protecting existing investments rather than profiting from a decline in a security's price. These other investment strategies do not embody the essence of short selling as defined.