How might an investor lose money in a short sale(selling short) of a security?

Short selling is absolutely insane for you if you are asking a question like this.

A "short sale" is basically a minus sign in front of what would happen if you bought a stock.

So, if you normally buy a share of stock (say for a hundred dollars) and it goes up a dollar, you make a dollar (or a 1% return). And if it goes down a dollar, you lose a dollar (for a -1% return). When you have sold a share short, if the real share goes up a dollar, you lose a dollar, and vice versa.

That's all there is too it. You lose money if the stock goes up, and make money if it goes down, the opposite of what would happen if you engaged in the normal transaction of purchasing a share.

(There are a number of related things that happen because you have to pay interest on the borrowed share, but you can invest the money that you got from selling, but at the same time you can't invest the money that you used to buy a share... you can ignore all this and interest you pay or receive all comes out in the wash; the market is fair.)

So, if it's so simple, why would it be insane for you to do? Because, most stocks go up most of the time.

Other investors have invested their money in companies that are out there, and many of those investors both have done more homework than you, and are smarter all around investors anyway. So, If a company has shares traded, that means that other people think that investment is going to go up. The stock market is not flipping coins, companies create value out of thin air by people working hard. So, people work hard and create value and shareholders benefit from that.

So, since shares are expected to go up, when would you ever bet that they'll go down?

Answer: NEVER

So, why would you short sell?

Well, you short sell to get rid of risk in your portfolio from other investments. Here is the easiest example: if you are Henry Ford VI and you inherited a bunch of Ford shares and you are not allowed to sell them, you can keep them, and short sell somebody else's. You still own yours, but if they go up $1, you don't earn the $1 because you also short sold another one which lost a dollar, so no matter what Ford does, you break even. Now you can invest your money sensibly in what you want, instead of all in Ford. All in Ford is risky, and short selling for you actually reduces your risk instead of increasing it.

That (and similar transactions) are what short selling is for.

if the product goes long

You sell short (sell to a broker without actually turning over the security) if you expect (or hope) a security will drop in price. Then you buy it back later at the lower price and have made money on the round trip, without a security ever changing hands. However, if the price goes up instead of down, you are in a bad position where you must sooner or later deliver a security (cover your short) that will cost you more to buy than you sold it for in the first place.