Short selling is usually described as betting against a company. The more useful description is mechanical: the seller is delivering shares they do not own and must obtain.
The trade begins with a locate
Before a short sale executes, the broker must reasonably believe shares can be borrowed for delivery, a requirement regulators impose to prevent failures to deliver.
Shares are typically borrowed from margin accounts of other customers, from institutional lending programs, or from other brokers through the securities lending market.
The borrower posts collateral, and the sale proceeds generally remain with the lending arrangement rather than being freely available to the short seller.
Borrowing has a running cost
The borrow fee depends on how scarce the shares are. Widely held securities cost very little to borrow, while heavily shorted ones can become expensive.
That fee accrues for as long as the position is open, which means the passage of time works against a short position even when the price does not move.
Fee rates change daily as supply and demand for the borrow shift, so a position established cheaply can become costly without any change in the underlying company.
The lender can ask for the shares back
A stock loan is generally recallable. If the lender sells the underlying shares or withdraws them from the lending program, the borrow ends.
The broker then either finds a replacement borrow or closes the position by buying shares in the market, regardless of what the short seller intended.
Forced buying by multiple short sellers at once concentrates demand, which is the mechanism behind the rapid price rises sometimes described as a squeeze.
The short seller owes what the shares pay
Because the lender has parted with the shares but not the economics, any dividend paid is owed by the borrower as a substitute payment.
Corporate actions such as splits and distributions are similarly passed through, so the short seller assumes obligations that a simple price wager would not create.
These payments are separate from the borrow fee and add to the running cost of maintaining the position over time.
The loss side has no arithmetic limit
A share purchase can lose no more than the amount invested, since the price cannot fall below zero and the position simply becomes worthless.
A short position loses as the price rises, and there is no ceiling on a price, so the theoretical loss is unbounded and margin requirements increase as it moves against the seller.
That asymmetry is structural, not a matter of judgment, and it explains why the practice is restricted to margin accounts with additional approval and disclosure.