The basic rule of thumb in investing is &quot;buy low, sell high&quot;. The twist here is that you don&#x27;t need to do it in that order (i.e. he was hoping to &quot;sell high&quot; first, then later &quot;buy low&quot; - referred to as &quot;shorting&quot;). So, since he thought the stock was overvalued (and that the price would eventually drop) he decided to sell some shares, even though he didn&#x27;t yet own any. The way he did this is by borrowing the shares from ETrade, then selling them. So he then owes ETrade the amount of shares that he just borrowed. Later (hopefully for him, when the price dropped) he could purchase shares of the stock, and repay ETrade. So, what he&#x27;s hoping for: Borrow X shares from ETrade, and immediately sell them at $2. Sometime in the future, buy P shares at ($2-y$) and return them to E*Trade. He makes a profit of P($2-$y) (excluding fees). Note here that the absolute maximum he can profit is P($2), if the stock goes to $0. What actually happened was that the stock had a dramatic price increase (something like +$14). At that point, ETrade wants its shares back that he borrowed at $2 a piece, so he buys them at $16 and loses P($14), which is much more than he had in his account.