Deep Dive: What Is Short Selling — How It Works, Why Investors Do It, and What Short Interest Tells You
Short selling is one of the most misunderstood — and controversial — strategies in financial markets. While most investors buy stocks hoping they'll rise, short sellers profit when prices fall. This mechanism plays a critical role in market efficiency, price discovery, and risk management, yet it routinely draws blame during market downturns and has sparked some of the most dramatic trading events in recent history. The January 2021 GameStop short squeeze, where retail traders on Reddit's WallStreetBets forum drove GME shares from roughly $20 to nearly $500 in weeks, forced several hedge funds into billions of dollars in losses and brought short selling into mainstream conversation. Today, GameStop trades at $23.77 with a market cap of $10.6 billion — a reminder that the mechanics of short selling create unique dynamics that every investor should understand, whether they plan to short stocks themselves or simply want to interpret what elevated short interest signals about a company's prospects. This guide breaks down exactly how short selling works, the real risks involved, how to read short interest data as an investor signal, and the mechanics behind short squeezes — using actual market examples rather than textbook abstractions.