What is one of the potential risks associated with short selling?

One of the potential risks associated with short selling is the possibility of unlimited losses if the price of the security rises. When an investor shorts a stock, they borrow shares and sell them with the expectation that the stock price will decline, allowing them to buy the shares back at a lower price for a profit. However, if the stock price increases instead, the investor is faced with the obligation to buy back those shares at a higher price.

Unlike traditional buying, where the maximum loss is limited to the initial investment (as a stock cannot fall below zero), short selling has no such limit. Theoretically, a stock's price can rise indefinitely, which means that the potential losses for a short seller are unlimited. This inherent risk makes short selling a more complex and precarious strategy compared to a typical "buy and hold" investment approach.

Understanding this risk is crucial for anyone considering short selling as part of their investment strategy and emphasizes the need for careful risk management and preparation.