Yesterday, you got the answers to eight of the most common questions I receive about penny stocks.

One of those questions was: “How do you make money when stocks go down?” To which I answered: Shorting the stock.

Let’s talk about that a little more…

Short selling is an investing strategy. You borrow shares of stock from your broker and sell them for a profit. If you want to speculate that a stock’s price will drop, taking a short position can be profitable. There are distinct patterns that identify these opportunities.

Let me show you how you can turn them into profits. Betting against worthless or near-worthless companies has made me a lot of money. I want to share that insight with you.

Here is the six step process you need to know.

Step #1: Identify the Stock You Want to Short

Start by identifying a stock that you believe will decline in price. That enables you to buy it back at a lower price. This is what earns you profit.

To do this, you have to learn the patterns that indicate when a stock is failing. We’ll cover those patterns in another issue.

For now, just learn the basic concepts. For example, be sure to approach short selling with diligence and a familiarity with the risks involved.

Another basic you should understand is shorting is 100% legal. Not everyone knows that. Also, understand that you’re not going to win every time you short. No one wins every time.

But, the more preparation you do, the more practice you get, and the more diligent you are in monitoring your shorted stocks, the better you will do.

Allright, so after you’ve I.D.’d the stock you think will fall…

Step #2: You Borrow the Stock

To short a stock, you need to sell a stock you do not own. How can you sell something you don’t own?

Let’s look at an example.

Say you want to bet against 1,000 shares of a penny stock. You’d need to go to a broker and ask him to loan you 1,000 shares when they have shares available to short. You’ll want to compile a list of go-to brokers who always have shares to short. Many brokers lack the tools to short sell penny stocks.

Therefore, they can’t and won’t allow investors to do so. But if your broker does allow it…and if they’re willing to loan you the shares of stock you want based on your account and other factors, you’ll get them. Then…

Step #3: You Sell the Stock

This one’s pretty simple. After your broker lends you shares of the stock you want you should immediately sell those shares in the market.

That leaves you with two things:

1. Cash from selling the shares you borrowed.
2. A “debt” to your broker of 1,000 shares of penny stock. Call it -1,000 shares.

Here’s what comes next.

Step #4: You Wait for the Stock Price to Decline

This part is simple. Just like when you buy a stock you have to wait for the price to go up…

When you short a stock you have to wait for the price to go down. If you are right about the stock price dropping — say it drops $2 per share — then your position of “-1,000 shares” would have made you roughly $2,000. That’s only a gain on paper, though.

To realize the gain, you need to go to the next step…

Step #5: You Have to Buy Back the Stock

The profit from shorting arises from the difference between:

1) The stock’s price at the time you borrowed and sold the shares. And…

2) The price at which you buy it back.

-1,000 shares x -$2/share =$2,000 profit.

Step 6: Return the Stock

Deliver the same number of shares back to your broker.

In our example, you’d return the 1,000 shares. Since you bought them back cheaper than you sold them for… you keep the difference!

Pretty cool, right? You can repeat the process when you identify the next opportunity, too.

And there are tons of opportunities.

Remember, if a company is totally worthless…even 1 penny per share means it’s overvalued.

You can, in fact, make money off of shares you don’t actually own. Short selling a stock that you believe will drop in price has risk, too. But if you look closely and learn to identify the trends and recognize the pump, huge opportunity exists in shorting penny stocks.