Global stocks started with a positive note in March after central banks assured of policy measures but many still doubt the severity of this quickly spreading disease. Many investors are still wondering what we can expect from the market as the virus continues to spread. Is this just a temporary dip, or we will witness for further market downturns?
Everybody has a different concept when it comes to making money in the stock market. One of the most common strategies to make money is to buy shares when the price is low and selling them at a high price when it rises. This is known as stock trading. You should always know the different concepts of the stock market. There are other methods that involve options and futures, but that’s beyond the scope of this discussion. Here we are discussing the simplest way how we can make money if the market falls further due to Coronavirus outbreak.
How to Make Money by Short Selling?
If you are going to invest in the market, it is best to understand that stock market corrections are going to occur. Financial markets have reacted more violently, with the recent pace of selling on Wall Street and beyond severe. Short selling works extremely well in a bearish environment. 'Trend is your friend' is the rule of thumb if you plan to make profits on a decline.
Like many other trading strategies, short selling involves significant risks and requires perfect timing. Entering the bearish territory too late or too early will result in no good. Bearing in mind all the risks and pitfalls, short selling opens a bunch of opportunities to make a profit in various market times.
- Identify the stock & short sell the shares:
Selecting or identifying stocks is an important process. Example: If you consider current coronavirus outbreak, we saw a drastic drop in Airlines and tourism stock sell-off. Norwegian Cruise Line (NYSE: NCLH), Royal Caribbean (NYSE: RCL) and Carnival Cruise (NYSE: CCL) all hit 52-week lows on the day, despite reports that the government may be willing to help the industry. In the meantime, airlines, banks and the shale industry will likely be among some of other most vulnerable sectors. But currently, all these sector stocks are trading too lower, the investors may consider buying the dips as well.
Wait for the stock to fall & Buyback the shares:
Once after short, the stocks wait for the downside move you anticipated then buyback or close the position at profit.
There’s no doubt short selling can potentially help traders get ahead, big time — especially as stock prices often drop much quicker than they rise. For any investor, it’s likely not a good idea to short all shares and looks for other replacement assets as well. With a set of interests that are nicely positioned across different asset classes and markets, you’ll be in a much better position to see out the coronavirus crisis with your wealth intact. One asset that has sidestepped the uncertainty in the market is gold. While stocks tumbled globally, the price of gold has soared, reaching around $1,700 per ounce. This was the most the commodity has been worth since February 2013, marking a seven-year high. Even the price retraced from $1700, the ongoing threat posed by COVID-19 may keep the precious metal afloat as the outbreak continues to drag on the global supply chain.
But since there are added risks and costs involved in shorting. So make sure you understand all the possible pitfalls before shorting your first stock. There’s nothing to be afraid of; you just need to consider the added risks against your potential upside (risk/reward).
References: Trading books about short selling
1) How to Make Money Selling Stocks Short (O'Neil, Morales)
2) Short-Selling with the O'Neil Disciples (Morales)
3) The Art of Short Selling (Staley)
4) Dead Companies Walking (Fearon, Powell)
5) Downside Protection (Sacheti)