Charlie Bucket heaved a heavy sigh and looked around for something salty. A pretzel would be good. Or some potato chips. Or popcorn. He shouldn't have had that last Everlasting Gobstopper.

The honeymoon was over for Charlie. After that fateful ride in the glass elevator, he had taken over the reins at Willy Wonka's chocolate factory. At first it had been a lot of fun. He'd eaten all he wanted, moved Grandma and Grandpa Josephine and Joe and Grandpa and Grandma George and Georgina -- and his mom, of course -- into the factory, and had really enjoyed learning all about the business. Before Willy had passed away (after eating a bad brussels sprout), he had been pleased with how well Charlie was improving the factory's performance.

Indeed, Charlie had introduced several new products, including the wildly popular Neverlasting Ephemeroppers -- which incorporated a brilliant marketing strategy. The products fizzled off your tongue so quickly that you had to eat some more immediately to try and figure out what the flavors were. In the last quarter, revenues had tripled over year-ago levels. Charlie's pure imagination was paying off and his annual bonus was handsome.

But now the candyman had to figure out what to do with all the money. He had already invested a lot of money in some solid stocks. Ones he knew about, like International Sugar, Amalgamated Cocoa, Global Corn Syrup Industries, and the Red Dye #2 Company. He had balanced his portfolio whe sensed that his portfolio needed something more.

That was why he was sitting on an enormous nougat mushroom, reading Dr. Mortimer's Be A Bejillionaire financial newsletter. He was trying to think of what to do with his portfolio. In his favorite online financial forum, he'd read about some interesting investing technique... but what was it? It had something to do with making money when the market or a stock fell. He remembered that this technique seemed like an excellent element for him, one which would provide a hedge against a market downturn.

An Oompa Loompa walked by, pushing a wheelbarrow of molasses.

What was that technique?

An Oompa Loompa stood on tip-toe to his right, trying to reach a jar of vanilla extract on a high shelf.

If only he could think of that technique!

An Oompa Loompa was now standing on the shoulders of the other Oompa Loompa, grasping unsuccessfully for the vanilla extract.

"If only they weren't so short..." Charlie muttered to himself.

Shorting! That was it -- the technique! Charlie smiled and plucked a gummy fruit from a tree branch next to him. Now he just had to figure out what stock to short. And how to short, of course.

Dr. Mortimer's latest newsletter was raving about a new small company, ChocoBug Incorporated, which was about to start selling chocolate-covered ants, gnats and ticks across the country. After ChocoBug had detailed their system for cleaning the bugs, Dr. Mortimer was expecting a rapid approval from the Food and Drug Administration, and surging sales. Dr. Mortimer predicted that the stock would triple within a year.

Charlie had some serious doubts about this. He remembered that his hocus-focus groups had nixed his plans to experiment with bugs. This seemed like a good stock to "short." If only he knew how to short!

Just then, one of the Oompa Loompas who had been crouching behind some sacks of sugar stood up. Charlie was surprised, because this Oompa Loompa was slightly taller than the others. And he wore a velvet jester cap, not the factory-issue white cap. (Readers: don't tell Charlie, but it was really Motley Fool!) He began to sing and dance...

Oompa Loompa doompadee doo
I can solve another puzzle for you.
Oompa Loompa doompadah dee
If you are Wise you shouldn't listen to me.
Shorting stock is fine when it's once in a while.
It stops you from smoking and brightens your smile.
You need to learn all about it, though, first,
Then you can profit when the stock shows it's cursed.
Oompa Loompa, doompadee dah
If you're not greedy you will go far.
You will live in happiness too
Like the Oompa Loompa doompadee do.
(And Fools do, too.)

Charlie wondered where the comment about Fools came from, but he let it pass. He asked the "Oompa Loompa" (nudge nudge wink wink) how shorting works.

"Easy, Mr. Bucket. All you have to do is...

1) Buy low and then sell high"

2) Buy high and then sell low"

3) Sell low and buy high"

4) Sell high and then buy low"

What did he say?

Enter your selection in the field to the lower right, and get immediate feedback on the answer!

The answer is...

4) Sell high and then buy low

You short a stock when you think that it is going to fall in value. You want to profit off its troubles, but you still can't get around the fact that to profit with stocks, you have to buy low and sell high. (Or occasionally buy high but sell higher.)

So how does shorting work? You just reverse the order. You still sell high, but you do that before you buy low. Your broker "borrows" shares for you from someone else's account. (Don't worry -- it isn't stealing -- you're required to replace the shares.) Once they're borrowed, you sell them at the current price. Then, once the stock falls, you "cover" your short by buying shares at their new, lower price, and replacing the ones you borrowed. The difference? It goes in your pocket, less any commissions owed to your broker.

Of course, if the shares go up, you'll have to buy them back at a higher price, and will lose money. And here's an interesting little detail about shorting. If you're "long" a stock -- which is to say, you bought it expecting it to go up -- you can lose up to 100% of it, right? If the company self-destructs, you might end up with nothing. With shorting, though, you can lose even more than 100%. Just as a stock can soar, anyone who's short it will be losing a bundle. Imagine that someone shorted Microsoft several years ago and never covered the short. He might have borrowed and sold the shares at a split-adjusted $2 each, but now he'll have to buy them for around $90+ each -- losing a heck of a lot more than $2. But that's a very extreme example. Normally, if you short a stock, you won't remain short for too long. You'll keep an eye on the stock, and will probably cover if the stock rises significantly -- say, 20%, perhaps.

Charlie was glad to hear this. He made a note to read more about shorting first. He reflected on the fact that now almost everything in his life was doing well. His factory was busy and productive. His garden was blooming. Advances in dentistry were making candy even more attractive to people. And now, he knew that he was close to having a perfectly balanced portfolio.

He suddenly remembered something that Willy Wonka had told him long ago...

"And Charlie, don't forget about what happened to the man that suddenly got everything he ever wanted. He lived happily ever after."

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