In its simplest terms, shorting stocks means that you are trading shares that you don’t actually have in your control. If you’ve typically traded shares in the more traditional format then you may be wondering what this means.

The old mantra was to buy low and sell high, so most investors would buy shares of stock that they would hold until the stock price began to climb, and then sell the shares for a profit. Investors who short sell stocks are doing the exact opposite. If the price begins to climb, you actually lose money rather than make money. Short selling stocks should not be used if you feel that the price of a stock is about to rise or if you cannot afford to lose a great deal of money if the stock does rise.

The only time this shorting method should be employed is if you are certain that the stock price is about to drop on a particular stock. To short sell a stock, you will “borrow” the stock that you’re interested in from your broker, so you never have true ownership of the shares. If the stock price goes down as you thought it would, then you buy new shares at the lower value that you can use to repay the broker.

The danger here is that once the price starts to go up, you can quickly find yourself owing a great deal of money to the broker. This is not like the traditional sale of stock where the amount you could lose was limited by how much you originally invested; if you miscalculate on a short you can owe a great deal more. Shorting stocks is not something a beginner should try because of the added risk. Beginners should stick to trying to find the best stocks to buy right now and holding on to them in hopes they go up and turn a profit.