How make money in a Market

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Eliminating any misconceptions

Many think it is only possible to profit in the stock market if you are invested in a rising market, although this is the most common way to profit in the stock market it is not the only way. There are ways in which you can actually profit from a recession equally as much as stock market boom . Follow along because there is more than one alternative.

A bear market occurs when the stock market has consecutive price declines. It is referred to as bear market because the way bears attack their prey in a downward swipe. 

The economies performance is often measured by stock indices, the most common stock indices is the S&P 500 which refers to the Americas top 500 companies.

Each county has their own stock indices such as the “CAC 40” in France or the “Hang Sang” in Hong Kong. If these indices see a decline it is an indication that that the economic performance of that country might be falling  is falling.

We believe there is currently a huge gap between professional and everyday investors. Where professional investors have access to insights and information that normal investors do not.  We’re here to bridge that gap by providing analysis that is accessible and easy to understand.

Indicators that point to a Bear Market

VIX – The CBOE Volatility Index (VIX) is a Index that is used to measure the level volatility in the stock market. The Higher the index goes the more unstable the stock market has become and is an indicator that points towards a bear market.

Demand for junk Bonds– A Junk is a bond that has a higher level of risk then government or corporate bonds and therefore a higher return. Junk bonds are issued buy companies that are struggling financially and have a high risk of defaulting. If the demand of Junk bonds decreases it is an indication that investors are interested in pursuing safer bonds. This is an highlights that investors are more risk adverse in the market pointing towards a bear market.

Stock Market Momentum  –  This refers to tracking the S&P 500 index and its performance against its 125 day moving average. Its 125 day moving  average refers to the performance of the S&P averaged over 125 days. If the S&P falls below the 125 day moving average it is an indication that a bear market could be occurring. 

Stock price Strength –  If you take into account all the stocks that have hit their 52 week highs and all the stocks that have hit their 52 weeks lows. You can find the difference between them and if their are more stocks that are at their 52 week lows then stocks at their 52 week highs it is an indication that a bear market could be occurring. 

PUT/CALL Ratio – The PUT/CALL Ratio refers to the number of Put options that are placed in the market vs the number of call options that are placed in the market. If the number of Put options in the market exceeds the number of Call option in the market the ratio would increase and is a sign that points towards a possible bear market. 

How to actually make money from a falling market ?

You would need sell a share you don't own.

As crazy as it sounds yes you can sell something you don’t own and in fact it actually happens millions of times daily the concept is called shorting. The best way to understand how shorting works is to simply reverse the process of how you would normally buy a stock. You can practice how to do that here. When we purchase a share we buy it first then sell it after closing the position, when we short something we sell it first and then buy it back after closing the position. What is effectively happening is you are borrowing shares then selling them at the market price immediately then hoping to buy the stock back cheaper closing the position and making a profit . Therefore you would only short an asset if you think it will fall in value. 

What are the risks?

There are many risks when shorting the first big one is that when traders short an asset they have unlimited risk. This is because the asset could rise to an infinite price which means to cover your short position you may need to pay more than you first shorted with. When you buy an asset long you can only lose the total amount you invested.

Shorting has trading risks as well one being that when a stock is on the rise and multiple investors are closing their short positions through buying back shares. It creates increased buying pressure on the stock causing it to rise more which in turn leads more short investors to cover their shorts though buying more shares. This is known as a short squeeze and can occur anytime.

An additional risk is if the stock’s price falls to 0 even if you were successful in shorting the stock and it went down as you predicted if the stock goes to 0 your short position is worthless. This is because if there is no market left to buy it back in then you would be unable to close your position which means you would lose your total investment.

Why shorting using CFDs can be less risky!

When trading with CFDs there is less risk is because there is no possible way you can get an unlimited loss with your short position. We believe this is the biggest risk of shorting overall. The reason this is possible is because certain companies that allow you to trade CFDs have a stop loss feature automatically build into their program which prevents investors losses exceeding their initial investment. CFDs are offered on trading platforms such as etoro and plus 500 they allow you to short sell very conveniently at the click of a button. This is hugely convenient as investors no longer need to go through a long traditional process like talking to a broker and borrowing shares to short.

Alternatives to Shorting

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One sure way to protect yourself from a falling market is a black swan fund these are funds that prepare for the worst and if you invest in these funds during a market downturn you would profit significantly for example due to the recent COVID 19 black swan event. Some Black Swan funds gained over 4000% due to COVID 19 these funds are designed in a way that uses derivatives and other financial tools like shorting to benefit from a falling market. As these events are so unpredictable it may be wise to allocate a small portion of your investment portfolio to a black swan fund using diversification to hedge your portfolio just in case the unthinkable happens like COVID 19. Even with a small portion allocated you would be able to protect your downside risk as these funds see significant returns when the economy freefalls.

ETF's that allow you to get exposure to a falling market.

ETF’s are a great way to get some exposure a falling market . You can invest in an ETF  and not have to worry about individually shorting and selecting certain stocks. Below is an example of an ETF that allows you to have short exposure if you’re not sure where to look.