Most people, when thinking about stocks, only consider the possibility of making money off of investing by picking companies that will make a profit. What most people don’t know is that there is a ton of money to be made by investing in just the opposite, companies that they believe are going to lose money. In fact, many would argue that this system keeps prices in check with reality. This article will discuss the basics of longing a stock, and its inverse, shorting a stock. Moreover, this article will discuss why so many are getting rich off a stock market that is tanking, while others are losing their retirements.
Longing a stock is the same thing as buying a stock, with expectations that the companies stock will increase in value over time, and in turn so will its stock price. Most people new to investing would think then that this market is terrible for investing, when in fact, the opposite is true for so many. While there are still many great companies to long while investing when the market is in a recession (as I discussed in this article yesterday where I looked at the 20 companies with the greatest percentage gains in share price over the past year), there are way more stocks that you could short, because you think their value will decrease.
Shorting a stock, as mentioned above, simply takes an approach and invests in options, with which they can profit off of the downturn of the economy as it relates to individual stocks and or on the outlook of a particular companies weak future. Take retailers in general during a recession for example, if you have unemployment rising and people with poor outlooks in landing a job in the near future, you would know that their needs for certain products and such would decline, as their incomes lowered or ceased. Rather than going out and buying new things, they would likely choose to save money and repair their existing goods. You could see that companies are not meeting expectations as sales continue to plunge, taking a toll on the stock, and make an educated guess that they will continue their decline for the foreseeable near future, and short the stock.
Shorting stocks does come with major risks, especially if buying on margin, however, this article was only intended to help the average investor see that there is potential to make a ton of money even when there is a recession at hand.
I will continue this discussion in the near future with certain insight on how to get started with trading in options, for those whom care to hedge their existing portfolios. I truly hope this helps open up a world of investing many never knew about or considered.
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