I’m usually late to parties, and learning to short a stock proved to be no different. Only during the 2020 pandemic did I see opportunities where money could still be made when the market was down. But how? It’s called shorting, or selling short, which means you benefit from a stock when the price falls.
It’s important to note that the history of the stock market trends upwards. Yes, there are dips — some bigger than others — but in the long term, the market goes up. When a particular stock or the market goes down, traders can profit because of the short-term position. Here are three ways to do this:
Traditional short selling entails borrowing shares from a broker for a fee. When you place a short-sale order for 100 shares of META (META 0.00%↑), the broker sells shares at the current price and lends them to you. As the price declines, your short position gains in value. When you reach your target exit price, you repurchase the shares resulting in a profit and closing out the short position.
The options market is a derivative of the stock market, or you are simply placing side bets based on the primary market. Instead of traditional short selling where you borrow shares, in a put option, you have a contract that allows you to buy shares or not at the time of expiration. The contract itself is the side bet and is worth money as long as the stock price declines.
Note: Options trading requires learning a new terms.
The third and final way to profit from a market downturn is to buy shares in an inverse ETF. This strategy is the simplest and most understood of the three, as you buy shares of an ETF whose objective is to make money from declining stock prices. In a previous post, I discussed TQQQ, a bullish ETF that increases as the Nasdaq 100 index increases. Conversely, when the Nasdaq 100 declines, the inverse ETF SQQQ benefits, allowing traders to make short-term gains.
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