The mechanics have been adequately explained already so no need to go into that again. One thing that should be pointed out (and this is no indictment of shorting; I do it on occasion) is that since a stock can only go down to $0, there is limited profit. It can theoretically go up without bound, so there is a risk of losing without bound too. Practically, these risks are limited, but also practically, the maximum profit is also.
