As it certainly appears that all stock markets may be headed down in the near future, I'll start with a couple of topics as to how an investor can MAKE MONEY when stock markets decline ..... but please feel free to add more ...
#1 - Inverse ETF's - these exchange traded funds can be bought and sold just like stocks, but are based on hedge fund investing mechanisms which cause the price of the ETF to move in the OPPOSITE DIRECTION of whatever index the ETF tracks. Here are the most popular ones ...
- inverse Dow Jones = DOG --- 2 * inverse Dow Jones = DXD
- inverse S&P 500 = SH --- 2 * inverse S&P500 = SDS
- inverse Nasdaq = PSQ --- 2 * inverse Nasdaq = QID
note that the inverse funds go up 1% for every 1% drop in the index they track. The 2 times inverse funds go up 2% for every 1% drop in the index they track.
Inverse ETF's are super-easy to buy and sell, and super easy to understand, but the drawback is that they are only available for a few specific indexes or sectors.
(disclosure ... I just bought a whole bunch of SDS a week ago )
#2 - Buy PUT options - higher risk for higher reward. Requires a brokerage account which will allow the trading of options contracts (which generally requires a credit check and authorization paperwork). Does not require that you buy/own any of the actual stock shares that the option contract is written for.
good explanation of put options at
I'll go through an example based on the stock of Countrywide Financial, which is a company that specializes in subprime mortgage loans and thus might be expected to take some serious declines in the shares of their stock CFC ... which closed at about $ 33.50 a share yesterday. If you look at you'll see all of the available October options contracts with all of the latest pricing. You'll see a put option listed called CFCVF, which constitutes a contract which grants you the right to sell 100 shares of CFC stock at a 'strike price' of $30.00 at any time up until October 20th. This put option is priced at $.50 a share so buying a standard 100 share contract would cost $50 (plus commission). If CFC shares stay at $33.50 or even fall to $30.00 by this coming October 20th the put option is essentially worthless and you lost the $50 you spent to buy it. However, if CFC shares fall to $28.00, the put option would be worth $(30.00 - 28.00) * 100 = $200 so you'd gain $150 in a month on a $50 initial investment. If CFC shares should fall to $25.00, the put option would be worth $(30.00 - 25.00) * 100 = $500 so you'd gain $450 in a month on a $50 initial investment. Every stock that has options contracts available (and not all stocks do) will have a different set of 'strike prices'. Also, different option contract expiration dates are available, but the longer term options cost more i.e. CFC $30 put options which expire in January rather than October cost $1.15 instead of 50 cents per share ! Also, to avoid being 'eaten alive' by commission costs when buying and selling options contracts, it usually only pays to trade multiple contracts so the transaction amount gets up to the $1000 ballpark at least (in the case of CFCVF October PUT's this would require 20 contracts)
As a side note, it is possible to buy PUT options on ETF shares ! Thus making an 'inverse bet' on the S&P 500 could be done via SDS shares (gaining 2 * the S&P percentage of decline) , or by buying PUT options on SPY ETF shares which directly tracks the S&P 500 (gaining on the dollar difference between SPY closing price when the options expire versus the 'strike price' of the option). However, lots of professional investors and hedge funds trade lots of dollar volume on index options to cover their butts, which means that these sort of options contracts are usually rather 'expensive' compared to the amount the share price must move before the options contract starts paying off !
Note that I am not recommending CFC put options or SDS shares, merely using them for examples.
Note also that both inverse ETF's and put options involve a FINITE amount of risk. In other words, if you guess wrong on an Inverse ETF and the index goes up 10%, your losses are limited to 10% (plus commissions). With a 2 * ETF if you guess wrong and the index goes up 10%, your losses are limited to 20%. With a PUT option contract, your losses are limited to the purchase price of the contract.
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