How Short-Selling Works

Most investors own stocks, profiting when they rise in value and losing money when their stocks decline. But for short-sellers, that basic dynamic is reversed, and you can actually profit when share prices decline.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through the basics of short-selling and what you need to know to be successful at it. Dan goes through the mechanics of short-selling with your broker, noting how you profit by paying less to replace borrowed shares after a stock price falls. He notes that with failed companies like General Motors before its bankruptcy, short-selling was extremely lucrative. But with other high-flying stocks, including Netflix and priceline.com , short-selling was extremely costly. Dan concludes that before you use short-selling, you need to understand the risks involved and know how to protect yourself from potentially huge losses.