Who wants to invest now?

Article Written By: JordanWeir

Even yoda might have trouble figuring out the current market environment. In a world of falling prices, how can wealth be protected? I have some news for you. Even in a falling market, wealth can be not just preserved; it can be created. With just a few simple techniques, Ill show you how to supersize your portfolio.andnbsp; Masters of short term stock speculation have long known about an ill-understood trading technique shunned by the masses. This technique makes money as stock prices fall, rather then profiting as they rise. This technique is known as shorting stock. Unlike purchasing a stock, where you buy it, and then hope that it goes up in value, or that you can collect the dividends from the stock far into the future, shorting a stock is a simple technique the masters use when they believe the stock will go DOWN. A risky play under normal conditions, but in a market like this, where most everything is dropping like a rock, its much safer then buying stocks.

While counter-intuitive, shorting stock is less complicated then you might think. The goal when shorting stock is the same as when buying; your trying to buy low, and sell high. The only difference is that you do it in the other order. You sell stock today, and you buy it tomorrow (or some other time in the future), hopefully for less. By doing so, you make a profit equal to the difference between your buying and selling prices.

An example... In late August 2008, Ford was trading for around 4.50. If you decided to short 100 shares of ford at that point, then you would borrow 100 shares of Ford from your broker and sell them for a total of $450. In late October 2008, Ford was down to the 2.25 range. At that point, you could buy back the 100 shares you sold for $225, return the 100 shares to your broker, and all in all, you made $225. In essence, you sold high, then bought low. Its just like buying low, and selling high andquot; it just operates in reverse. This would be a good time to re-read this paragraph, its that important.

For those abstract thinkers, it may be easier to conceptualize shorting as simply buying a negative number of shares. When you own 500 shares of a company, and the companies stock price increases by $1.00, you make $500. When you own -500 shares of a company, and the companies stock price increases by $1.00, you lose $500. However, when you own -500 shares, and that company then plummets by 5$, now you stand to gain $2500. As they say, the bull goes up the stairs, but the bear goes out the window. Markets fall faster then they rise, so the time to make money is now! Regardless of how you play the markets, an eye must be kept on the most important element of all andquot; risk. While shorting helps to remove some of the systematic risk from your portfolio andquot; a portfolio composed of both buying stocks, and short stocks, is less venerable to a market crash andquot; it does carry its own unique risks. Especially in a bear market, it pays to watch the news on your shorts. Any good news that comes out may raise the stock price of those that your shorting, and if a stock isnt going down anymore, its not a good stock to be short. The bigger risk to your short positions is the end of a bear market. When the new bull market ends, many short positions will quickly swing towards unprofitability, and so you must be quick to close them.

When deciding how to manage risk, a good tool to use is the 5% rule. This rule states that you should use stop losses to never lose more then 5% of your overall investment portfolio on any individual trade. So if you have a $50000 portfolio, then you should risk no more then 5% of that andquot; $2500 andquot; on each trade. This doesnt mean you shouldnt invest more then $2500 in any one idea. It just means you shouldnt lose more then that if things go wrong. Heres an example. If you buy a stock for $30 per share, and you set a stop loss at $25, you can lose up to $5 per share on that stock. This means you can buy up to 500 shares without violating the 5% rule. However, if your stop loss was at $20, you could only buy up to 250 shares without violating the 5% rule. 5% is also a bit high for most traders. Unless you have a very long timespan, most of your trades should be closer to the 2-4% range, with 5% being the highest risk trades.

In a bear market, there is just one, singularly important, yet amazingly simple truth that must always be kept in mind. Everythings going down. Throw 3 random letters together, and pull up a stock chart, and every time, youll see declining prices throughout a bear market. With this in mind, shorting is the only thing that makes sense. Masters of this technique have been pulling millions in from the market since the dawn of the last century. As far back as the 1929 crash, Jesse Livermore made $100 MILLION using this technique. In a strong bear market, shorting etfs and stocks can be a brutally efficient cash machine.

About the Author

Confused about ETF's shorting stocks, crashing markets or any of the other terms? Or just interested in cashing in on this once in a lifetime opportunity? Click here and Learn How to short stocks

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