If you can make money in the markets when a stock goes up or down, volatility is a traders best friend. Most investors are not traders, so volatility becomes a reason to worry about the markets especially when the volatility is on the downside. Many investors have abandoned equities because of increased volatility and the desire to “protect the downside”. It is imperative that all investors should have a portion of their portfolio in investments that make money when equities go down. This type of investing is called “short selling stocks.”
Short selling is betting against a stock, making money if the stock goes down in value. This is an advanced trading strategy with many unique risks and pitfalls. Many investors feel that shorting a stock is “un-American” because you are betting against our economy. However there are research analysts searching for overvalued companies that look like they have a chance of going down in value. You are not really betting against the company, as much as you are betting against the value put on the company.
Short selling is betting against a stock, making money if the stock goes down in value. This is an advanced trading strategy with many unique risks and pitfalls. Many investors feel that shorting a stock is “un-American” because you are betting against our economy. However there are research analysts searching for overvalued companies that look like they have a chance of going down in value. You are not really betting against the company, as much as you are betting against the value put on the company.
There are special requirements that need to be done to “short stocks”:
1. You need to borrow the stock. You have to call a broker and ask to borrow the stock. Some stocks are harder to borrow than others. You will also need to have a margin account which means you may have to put up some money or stocks. This may mean you are charged some interest while you wait for the stock price to fall.
2. You sell the borrowed stock to open the position. You now have a short position as opposed to a long position. Your goal is to buy your short position back at a lower price. Your account will be “marked to market” which means, because you are on margin, if the position goes against you (stock price goes up) you may get to a point that your brokerage firm will require you to put up more equity (money or stock).
3. When you close out your position, if the stock has gone down in value, you will make money (buy it back at lower price). If the stock price has gone up, you will lose money because you sold the stock at a lower price.
There are other ways of making money if a stock goes down in value. In the stock option market you can buy a put. A put goes up in value when the stock associated with the put goes down. There are also ETF’s (exchange traded funds) that are based on shorting a particular index, sector or commodity. This is probably the easiest way of making money on the downside. Before you invest in an ETF that shorts, make sure you understand the underlying investment.
In today’s volatile market, it is beneficial to be able to make money on the short side. See a financial professional to get you started in the right direction. There are many moving parts but if you can work with someone or can do it yourself it can help you “protect the downside”. For more information on portfolio management or for any of your financial planning questions, feel free to email Andy at aguzzetti@dlgwm.com or Contact Us.
2. You sell the borrowed stock to open the position. You now have a short position as opposed to a long position. Your goal is to buy your short position back at a lower price. Your account will be “marked to market” which means, because you are on margin, if the position goes against you (stock price goes up) you may get to a point that your brokerage firm will require you to put up more equity (money or stock).
3. When you close out your position, if the stock has gone down in value, you will make money (buy it back at lower price). If the stock price has gone up, you will lose money because you sold the stock at a lower price.
There are other ways of making money if a stock goes down in value. In the stock option market you can buy a put. A put goes up in value when the stock associated with the put goes down. There are also ETF’s (exchange traded funds) that are based on shorting a particular index, sector or commodity. This is probably the easiest way of making money on the downside. Before you invest in an ETF that shorts, make sure you understand the underlying investment.
In today’s volatile market, it is beneficial to be able to make money on the short side. See a financial professional to get you started in the right direction. There are many moving parts but if you can work with someone or can do it yourself it can help you “protect the downside”. For more information on portfolio management or for any of your financial planning questions, feel free to email Andy at aguzzetti@dlgwm.com or Contact Us.
