Ok, so, there's a concert by <insert favourite musician> in 4 weeks.

Tickets are sold at 100$. But the show is extremely popular, so the tickets are traded, and the price shoots up to 300$. You think the price is still going to go higher, so you buy a ticket for 300$. The price goes up to 400$, you sell the ticket, and you made 100$. (You were long, and the price went up - you made money.)

Now, the price goes to 5000$. You think, well, that's way too much - you're sure the price is coming down. So, what to do? Well, your friend Mike is going to go to the concert, he has a ticket, and he wants to keep it. He doesn't care what the price is, he's going to the concert. So, you say, listen, Mike, can I have the ticket for a week or so? I'll give it back before the concert. He says, sure, and hands you the ticket.

You go and sell the ticket for $5000. A week later the ticket price has come down to a more reasonable $4000. So, you go buy a ticket for $4000, and hand it back to Mike. You received $5000, spent $4000, and made $1000, because you were short, and the price went down.

That's the basic mechanic of short selling.

Now, assume the price is going up though. The price could go up to $100000. The date of the concert is coming closer. Mike wants his ticket back. Dang, you have to go out and buy the bloody ticket for $100000. You lost your shirt, because the price went up while you were short a ticket.

Ok, price is back at $5000. You think the price is going to fall, and want to short. You put an ad in the paper saying that you have a ticket to sell. Joe calls and wants to buy the ticket. However, Mike is out for lunch. You tell Joe to transfer the money, you'll mail him the ticket. When Mike comes back, you ask Mike to borrow the ticket. He might or might not give it to you - if he doesn't then you either have to buy it from someone else, or you're stiffing Joe.

That's a naked short.