A short seller pays interest on the borrowed shares plus any dividends declared during the borrow. The maximum profit is 100% (if the stock goes to zero), while the maximum loss is theoretically infinite (the price can rise indefinitely). For this reason most brokers require margin, set hard borrow availability and may force a 'buy-to-cover' at any time if the borrow is recalled.
Short selling plays an essential role in price discovery and fraud detection. Hindenburg Research, Muddy Waters and Citron have exposed dozens of frauds by publishing short theses backed by detailed forensic work — Wirecard, Luckin Coffee, Adani Group. Regulators in Switzerland (FINMA) and the EU require disclosure of net short positions above 0.5% of issued capital.
Retail investors should approach short selling with extreme caution. The risk profile (unlimited downside, capped upside, carrying cost) is the inverse of long investing and demands much tighter risk control. Most retail 'shorts' use put options or inverse ETFs as bounded-loss alternatives.
A trader shorts 100 shares of XYZ at CHF 50 (CHF 5,000 proceeds). Borrow cost: 2% per year. Three months later the stock falls to CHF 35; she covers at CHF 3,500. Profit: CHF 1,500 minus CHF 25 borrow cost = CHF 1,475 (29.5% return on margin in 3 months). If the stock had risen to CHF 80, the loss would have been CHF 3,000.