Traders and investors have had the chance to make reasonable returns in the stock market. During a market crash, however, huge losses can be made, and prices of stocks could suddenly decline across a major cross-section of a stock market. Today’s video will give you five ways of making money as an investor even when the market experiences a crash. Let’s start at number five.
5. BUYING AT THE BOTTOM.
When a market falls, both good and bad stocks’ value will decline. However, a good stock will tend to recover quickly, and the fall in price could constitute a good buying opportunity. Assessing balance sheets, valuation, debt levels management strategies, interest rates, etc., can be done by traders to identify opportunities that allow them to buy from the bottom. Lenders in a market also look at companies best positioned to pay off debts and recover from market losses. Buying from the bottom gives an investor the chance to purchase stock after its fall in value. The dip in price may present an opportunity to buy shares at a discounted price, enhancing future gains when the stock rebounds to its previous or higher price.
4. UTILIZING DEFENSIVE STOCKS.
Defensive stocks are shares of companies that are perceived to be consumer staples, and therefore the products of such companies are needed whether the market is in a bull or bearish state. For instance, food, utilities, and beverages are necessities that an economy will continue to promote even when declining. Given the constant nature of defensive stocks, they can be utilized by investors to continue to make money even when there is a crash in the market. An added advantage of defensive stocks is that they can also monitor the market and mood, using companies as indicators for whether or not the broader stock market is thriving.
3. TRADING SAFE HAVENS ASSETS.
The third way traders can make money even during a stock market crash is to utilize safe-haven assets. Safe-haven assets, just as the name justifies, are assets that allow for protection and trading even in a market crash. A safe-haven asset is a financial instrument that typically retains its value or may even increase while the overall market declines. Safe havens are negatively correlated with the economy; therefore, in a market downturn, they have the odds of outperforming the majority of the financial markets.
Therefore, they are used to cushion market declines and limit the exposure of an investor’s portfolio to negative shocks. Examples of safe-haven assets include gold, most commonly used, government bonds, U.S dollar, and Swiss Franc. The prices of gold, for instance, will soar even in a market crash because it has a negative correlation with the stock market. However, despite the availability of these instruments, it is not automatic for assets considered safe havens to perform in every market downturn.
2. DEALING SHORT ETFs.
An inverse ETF, otherwise known as Exchange Trade Fund, is constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. Inverse ETFs comprise mainly derivatives that enable an individual to speculate on financial markets and hedge against risk using legally binding agreements to buy and sell an asset at a predetermined price on specific expiry date.
Simply put, ETFs are similar to holding various short positions, which involve borrowing securities and selling them with the hope of repurchasing them at lower prices. Buyers are obligated to receive assets for an agreed price, while sellers are also obliged to part with assets. Many inverse ETFs utilize daily futures contracts to produce returns. Futures contracts work by tracking the spot price of an underlying market, taking into account factors such as volatility, time until delivery, and interest rates.
Futures are highly standardized and allow investors to bet on the direction of a securities price. It is important to note that inverse ETFs allow investors to profit in a downward market without having to sell anything short. However, they are not considered long-term investment vehicles because the derivative contracts on which they are based will be bought and sold daily by the fund’s manager. Consequently, they are commonly used to hedge portfolios against a decline in the short term.
1. SHORT SELLING.
Top on our list to make money even in a bearish market is to sell short. Short selling like ETFs is also a function of derivatives trading. These derivatives are speculative, take their price from the underlying market price, and do not require a trader’s ownership. One of the popular ways traders can sell short in a market is the traditional method which involves borrowing the share and selling it at the current market price.
If the market experiences a sustainable decline or downturn movement, then shares can be repurchased at lower prices. The shares obtained are returned to the lender, and the trader takes the difference as profit. Trading contracts for a difference or CFDs is another way to sell short in a market during a crash.
CFDs are ways of making assumptions on a financial market that don’t require the buying and selling of underlying assets. With CFDs, contracts are purchased to exchange the difference between the opening and closing price of a stock. This gives a trader the option to either go long or short of obtaining an advantage in both rising and declining markets.
This has been it for our top five ways of making money during a bearish or stock market crash. We hope you picked a thing or two from our video. There are other videos on the stock market, so do remember to check them out. Subscribe to this channel for more great content and till we come your way again, enjoy the rest of your time.