Every day, the stock market seems to continue its precipitous drop towards worthlessness, crushing hopes, dreams, and investors in a flurry of dizzying price movements. Yet there is an answer; a light in the darkness, used by the masters of investment to generate excess returns even " no, scratch that, - especially in falling markets like this one.
The technique Im referring to happens to be popular with hedge fund managers " those stock market whizzes pulling millions of dollars a year in exchange for managing their portfolios. This technique was also responsible for the creation of many a millionaire during the 1929 stock market crash. Yet this same technique is shunned by the public, due to its intrinsic counter-intuitive nature. Still, mastery of this technique " and its a lot simpler then you may think " its essential to doing well in bear markets such as this one.
While counter-intuitive, shorting stock is less complicated then you might think. The goal when shorting stock is the same as when buying; your trying to buy low, and sell high. The only difference is that you do it in the other order. You sell stock today, and you buy it tomorrow (or some other time in the future), hopefully for less. By doing so, you make a profit equal to the difference between your buying and selling prices.
An example... In early October, Kellogg (K) was trading for around $56.00 per share. Over the next two months, it dropped from just over $55.00, to $42.00 per share. Shorting 100 shares of Kellogg would have, in this instance, had a profit of $1400. The procedure would be the following. When you short the stock at $56.00, you borrow 100 shares from your broker, and sell them on the open market, giving you $5600. Later on, you decide to buy back those shares, and return them to your broker, while Kellogg is at $42.00. This costs you $4200. Now you have covered your short position, for a profit of $1400. Not to shabby for 2 months, and a $5600 investment.
Another way to think of shorting stocks is to own a negative number of shares... If you own 100 shares of a stock, and it goes down $10, then you lost $1000. If you own -100 shares of a stock (or your short 10 shares of a stock), and it goes down 10$ then you gain $1000. Of course, if the unthinkable happens, and the stock appreciates by 10$, then your down $1000 (What, did you think it was riskless?).
Of course, when playing the markets, there is always potential for losses. When shorting during a bear market, you should keep an eye on recent developments. A bailout such as the one received by financial stocks could easily send some once floundering stocks into a new uptrend, and when such things occur, you must be quick to cut your losses. Perhaps the biggest risk to a short play is the end of the bear market. The end of bear markets are typically highlighted by a powerful upwards move, regardless of the bad news going on at the time. When in doubt, get out.
A typical risk-management choice many professionals use is the 5% rule. When your trading stocks, dont risk more then 5% of your portfolio on any one position, and preferably less. So with the $20000 portfolio, risk no more then $1000 on a trade. This doesnt mean you cant invest more then $1000 per trade. It just means that your stop loss should be triggered before $1000 is lost. So if you short a stock at $20, and have a stop loss at $25, then you can buy up to 200 shares (far more then the actual value of your portfolio). If your time span is shorter, then you should use a smaller percentage, while if your timespan is longer then a couple months, the 5% rule could be adjusted as high as 10% (for the risk-tolerant).
When it comes to stock picking, some people would call this a challenging market. And traditionally, we have been taught that buying low and selling high is the idea scenario, so looked at from that sense, perhaps it is a challenging market. Or is it? With everything covered already in this short document, you have already learned that a so called "challenging market" can be a bonanza for those who have learned how to short a stock or etf. - 16003
The technique Im referring to happens to be popular with hedge fund managers " those stock market whizzes pulling millions of dollars a year in exchange for managing their portfolios. This technique was also responsible for the creation of many a millionaire during the 1929 stock market crash. Yet this same technique is shunned by the public, due to its intrinsic counter-intuitive nature. Still, mastery of this technique " and its a lot simpler then you may think " its essential to doing well in bear markets such as this one.
While counter-intuitive, shorting stock is less complicated then you might think. The goal when shorting stock is the same as when buying; your trying to buy low, and sell high. The only difference is that you do it in the other order. You sell stock today, and you buy it tomorrow (or some other time in the future), hopefully for less. By doing so, you make a profit equal to the difference between your buying and selling prices.
An example... In early October, Kellogg (K) was trading for around $56.00 per share. Over the next two months, it dropped from just over $55.00, to $42.00 per share. Shorting 100 shares of Kellogg would have, in this instance, had a profit of $1400. The procedure would be the following. When you short the stock at $56.00, you borrow 100 shares from your broker, and sell them on the open market, giving you $5600. Later on, you decide to buy back those shares, and return them to your broker, while Kellogg is at $42.00. This costs you $4200. Now you have covered your short position, for a profit of $1400. Not to shabby for 2 months, and a $5600 investment.
Another way to think of shorting stocks is to own a negative number of shares... If you own 100 shares of a stock, and it goes down $10, then you lost $1000. If you own -100 shares of a stock (or your short 10 shares of a stock), and it goes down 10$ then you gain $1000. Of course, if the unthinkable happens, and the stock appreciates by 10$, then your down $1000 (What, did you think it was riskless?).
Of course, when playing the markets, there is always potential for losses. When shorting during a bear market, you should keep an eye on recent developments. A bailout such as the one received by financial stocks could easily send some once floundering stocks into a new uptrend, and when such things occur, you must be quick to cut your losses. Perhaps the biggest risk to a short play is the end of the bear market. The end of bear markets are typically highlighted by a powerful upwards move, regardless of the bad news going on at the time. When in doubt, get out.
A typical risk-management choice many professionals use is the 5% rule. When your trading stocks, dont risk more then 5% of your portfolio on any one position, and preferably less. So with the $20000 portfolio, risk no more then $1000 on a trade. This doesnt mean you cant invest more then $1000 per trade. It just means that your stop loss should be triggered before $1000 is lost. So if you short a stock at $20, and have a stop loss at $25, then you can buy up to 200 shares (far more then the actual value of your portfolio). If your time span is shorter, then you should use a smaller percentage, while if your timespan is longer then a couple months, the 5% rule could be adjusted as high as 10% (for the risk-tolerant).
When it comes to stock picking, some people would call this a challenging market. And traditionally, we have been taught that buying low and selling high is the idea scenario, so looked at from that sense, perhaps it is a challenging market. Or is it? With everything covered already in this short document, you have already learned that a so called "challenging market" can be a bonanza for those who have learned how to short a stock or etf. - 16003
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Confused about ETF's shorting stocks, crashing markets or any of the other terms? Or just interested in cashing in on this fantastic opportunity? Click here and Learn How to short stocks
