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 , 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.

Take a look at the long side
Short-selling would have been disastrous over the past several years, and even those who simply stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends General Motors, Netflix, and and owns shares of Netflix and Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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