One of the worst facts of the great depression was that many investors were affected by the 89% drop in prices that occurred throughout the board. What happens if it occurs again? How could investors save their money from going down the drain?
If you look at the main causes of the great depression, the main cause was simply overpriced stocks and panic selling. Those are two things that tend to happen a lot in the stock market.
There is only one thing to do in order to save yourself from losing money when stocks go down, learn to trade the downside. Below are some ways to profit as a stock or the market in general is falling.
1. Short the Market
Of course you can always short the market. This involves borrowing a stock or ETF from your broker and selling it at market price. You will have to buy it back at a later date in order to pay back your broker. The idea is to short a stock right before a major decline, buy it back at a lower price and profit from the difference.
This can be a pretty interesting way to profit from a falling stock, but it also means that you have to be ready to get out of the trade at a moments notice because there is no limit to how much a stock can go up if it turns around.
2. Buying options
Trading stock options allow you to make money as a stock goes down. For example if you buy the $40 put option you buy the right to sell the stock at $40 in the future. Your right to buy the stock at $40 would become more valuable as the price of the stock goes lower. You do not have an obligation to do anything in this situation, so the most you could lose would be the value of the option.
3. Selling Options
Another strategy is to sell something called a bull put spread which allows an investor to make money as long as a stock stays below a specific value. Bull put spreads tend to give an investor good odds of being right because many times it allows an investor to profit if the stock goes down sideways or even up a little bit.
