Aug 19, 2009

How to Short Sell: Earn in the Falling Markets?

As a matter of fact you can earn more money in a falling market than in a rising one because when the market rises, it rises like a bull climbing the stairs but when it falls, it falls like a bear thrown out of the window. But the question that comes into picture is how? The simple answer to this question is short selling.

What is short selling?
Short selling means selling the shares which you do not own i.e. First you sell the shares at a higher price and then buy them in the same quantity at a lower price. Basically, in simple words it means you are selling the shares at a higher price which you normally do, but the difference is that the shares which you are selling are not owned by you. You will buy these shares later at a suitable lower price. The margin between the buying and selling is your profit.

What is the right way to short sell?
Short selling should be done when you are sure that the market is going to fall. But how can you know that for sure? There are times when it is almost certain that markets will fall, such as conditions like global market meltdown, corrections etc. These are the best times to short sell as the market along with most of the stocks falls heavily in such conditions. If you do it right you would earn quite more than what you could have earned in a rising market.

Also Read: 3 important things to know as a new investor!!!

You can also insure yourself in case the trend reverses by purchasing options such as call or put depending upon whether you are going long or short. These options tend to limit your losses to the level which you have decided no matter where the stock price is.
(I would be explaining Call and Put Options in the forthcoming Posts. You can get them in your mail by Subscribing here)

Which companies should you short sell?
When a market crashes almost all the stocks fall. But to maximize your earnings you will have to pick some stocks which fall the most. Such stocks can be of two types one which are high growth stocks and other which are speculative stocks.

The high growth stocks: These have huge investor interest and so when the market starts falling huge selling is seen in these stocks. Also as these are trader's favorite, shorts are opened in these stocks earlier than in the others which pull the stock prices further downwards.

Speculative Stocks: These have no fundamental foundation. The stock price of such companies is controlled by the traders and hence when the market falls these tend to have high selling and build up of shorts which pull the stock price down.

So the next time when the market crashes you know what to do. Just keep a cool head and look out for stocks which fall the highest and just enjoy your profits as the markets fall.

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