How to Profit When the Stock Market Goes Down
Watching the stock market fall in real-time can induce fear and panic and that’s exactly what happened in late February and March of 2020, as trading responded dramatically to the coronavirus pandemic. Let me tell you one secret, the stock market is like just about anything else in life. It goes in cycles, with ups and downs. There’s an old saying that trees don’t grow straight to heaven. This also applies to stocks.
Beginners in the stock market tend to think about investing as buying stocks and making money when those stocks go up. That’s the most common way to profit from stocks, but it’s not the only way. Believe it or not, it’s also possible to make money when stocks go down.
If you’re looking to take advantage of falling stock prices, here’s what you can do to potentially earn a profit.
Short-selling, perhaps the most common way of profiting when a market declines. It is a simple concept like an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.
Suppose the shares of company ABCD currently trading at Rs 500 and you think the price will go down. You borrow 100 shares of the company from a broker and you sell it in the open market and gets Rs 50,000. If the price of the company goes down to Rs 450 for one share, you buy 100 shares for 45,000 and you then replace the shares that you borrow from the broker. In this trade, you make a profit of Rs. 50 for every share, as you sell at a higher price and buy at a lower price. The total profit is from this is Rs. 5000. And keep one thing in mind if the price goes up, you will suffer a loss.