Trading in stocks is somewhat more of a gamble. When one decides to deal in stocks, they are aware of the volatility of stock markets. Stocks prices will go up one instance and spiral down the next. Whatever the case maybe, an investor will either make more money or lose large sums in investments. However, in this regard, let us look at a market whose stocks have gone down. By the time you are done reading this, you will have learned one or two things on how to make money when stocks go down.
As indicated earlier, there are only two things when you decide to invest in stocks. Either you earn or you lose. There is nothing more frustrating and annoying then when your stocks go down. For some it can be so devastating that it can ruin their whole investment portfolio. So, when the stocks go down, how can an ordinary investor make money?
There are several ways, or practices, that an investor can use to make money when stocks go down. These methods are not necessarily cast in stone. It should be noted that it is actually not always possible for investors to make money by buying low-priced stocks and then selling them at high quotes to “make a killing” on them. This is a popular belief that is quite misleading.
Like in any business, trading in stocks is a risky undertaking. You could end up owing more money than you put in and expected to reap, or you could lose your entire investment when stocks “go crazy”!
Of the several ways on how to make money when stocks go down, here are some of the most commonly known ways that any investor can use in such a situation.
Known as shorting stocks, this method is the most popular route one can take if they really want to make money when stocks go down.
Before you consider shorting stocks, you must bear in mind that you are first of all required to have an approved margin account. This is the account you will use to borrow shares that you do not own. You do this after watching and deciding that certain shares are likely to go down. So, you buy those shares. The moment the prices go up, you are able to sell these shares while retaining the difference you make from the borrowed shares.
To illustrate this, let us take the case of an imaginary company, ASDF Services. The trading rice of this company is pegged at $10.00 a share. As you go about your business, you think that the share price of this company could go down. With the fact that you already have a margin account, you decide to short 100 shares in this company, which translates into $1,000.00. By shorting the 100 shares, it means you are merely borrowing those ASDF Services shares from your broker. Soon, as you had envisioned, the stocks go down to $5 a share!
This is the stage when you decide to cash in. You make your intention known that you do want to buy these 100 shares at the latest price, which is $5. In this process known as covering, you decide that you want to return those shares you borrowed. Since you shorted at $10 and have now covered at $5, you will have made a good 50% profit. With ease and suave, you would have made $500 on those 100 shares selling at $5 per share.
In short, you cash in on shares that you really don’t own. Because of your knack at trading, you are able to make money when stocks go down by shorting them. In this scenario, you would only hope that the trend is not opposite. For, if the prices of the shares you shorted went up instead, you would have to pay more than you bought them at.
To be a good investor, one must be a risk taker. Buying and selling shares can be a gamble. Everyone knows it is a risky business. So, to make money when stocks go down, you can also get involved in what is known as “options trading.” This is an environment that allows you as an investor to make predictions on the movements of stocks, that is, whether they will go up or down. In options trading, what is involved is more betting on the direction of stocks. There are two types of options trading:
- Buying Puts
Puts allow you to buy and sell stocks at a fixed price, thereby earning you some profit from that transaction. Normally, as an investor, you will identify the shares that you want to buy option puts of. You buy the puts with the condition to sell the shares at a fixed price within a set time-frame. So when the market price of those stocks fall to below the fixed price, you would be able to sell your shares and make a profit. A good investor will buy puts, with a good prediction, and wait until the prices go way down below the fixed sell price. That way, as a trader you earn a very handsome return on your investment.
- Writing Covered Calls
The other way you can make money when stocks go down is by doing what is known as “writing covered calls.”The most important to take note of on this one is that you must be the owner of more than 1oo shares, since writing covered calls is only done in units of 100 shares. The second important thing to note is that, normally, a covered call is written by an anonymous buyer. As a trader, you are at a good advantage to make good earnings on shares that either go down or stagnate at the same level. So, the moment your stock picks up to anywhere above the set price, you are a able to write a covered call in multiples of 100 shares and the anonymous buyer will then pay a premium on that stock, which enables you to keep the cash as profit. You may have to sell the stock if the price goes above the set price. However, whatever the case, you still get to keep the premium!
Making money when stocks go down is an art that can be perfected by the ordinary trader. The most important thing you need to know is how to tell which stocks are worth risking your investment on. There are several books, papers and manuals written on how to make money when stocks go down. Such materials do not necessarily provide the hard and fast rules, but are just guides for you to learn the ropes of the trade, so to speak. As a trader, it is important to bear in mind that such material is for general information and cannot be relied upon to make important investment decisions.