I read an article yesterday about how now–yes, right now–is a great time for short selling. Now, I’m not a real big stock market analyst or timing advisor, so I’m not going to say whether or not I’m bearish about the market. What I’m going to do is explain the long and short of short selling.

When you own a stock–the certificates are issued to you and the position shows up in your brokerage account–you are considered “long” the position. When you don’t own the stock, but you sell it anyway, you are selling short.

So, wait. How can you sell something you don’t own?

When you short sell, there is a window of time before you have to fulfill your promise to give the buyer the position. Let’s say you are bearish about AIG. That means you think the price of AIG is going to fall. You short sell one lot (100 shares) of it today at $26 and your buyer gives you $2,600. Then, you buy AIG before you have to fulfill your seller’s obligation.

If your bearishness is correct, you’ll be able to buy AIG for less than $26 a share and make a profit. If you are wrong, then you will lose money.

*I should clarify that this is Naked Short Selling. You can also borrow the shares, making this not naked.