One of the chilling facts of the great depression was that nearly every investor lost money, and many even lost their life savings. It can potentially happen again, so what could you do? Could investors do anything to prevent themselves from losing money in a situation like that?
After all if you look at what caused the great depression of the 20s, it was pretty mush overinflated prices followed by a whole lot of panic selling. That seems to happen a lot in the stock market and can definitely happen again.
So, if you are in the market and want to be prepared if something like that happens then one thing you can do is to 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
The first method of making money from a falling market is to short it. This involves borrowing a stock or ETF from your broker and selling it at market price. This way you are able to buy back the stock at a later date, hopefully for less then you sold it for, and return it to your broker.
This can be a nice way to make some money, but if the stock turns around there is an unlimited loss potential so exiting out of it quickly when you are wrong is a good idea.
2. Buying options
Trading 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. As the stock falls lower and lower your right to sell it at $40 becomes worth more and more. 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. This offers a higher probability trade, because you make money as long as the stock stays below a certain level.