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In this tutorial, Clay Preston explains how to use shading and highlighting in Word. He starts by selecting a color, specifically yellow, for shading. To apply shading, you need to cover the entire line by using the bucket icon to choose a color. He demonstrates that this will shade the entire line of text. For highlighting, he instructs users to select the desired word first, then use the paintbrush icon to pick a color. This way, only the selected word is highlighted rather than the entire line. He concludes by encouraging viewers to like and subscribe if they found the video helpful.