We all know that at some point the stock market will go down. We do not know when, how or how much … not even if it will be below current levels. But the truth is that markets work thanks to volatility, and as the popular saying goes, “everything that goes up, must have to come down”. Most of the investors do not know how to earn money in share market daily when an asset goes down.
The fundamental dynamic of the stock market is that we can buy shares of companies or other assets. If the price of these assets goes up, we sell them and we have generated a profit. If it goes down and we sell cheaper than what we have bought, we will end up with less money than in the beginning. Up to here everything very elementary. But how is it possible to earn money when something goes down in price? There are different ways to have exposure to the downside, some more complex than others.
All bearish strategies require a little more sophistication on the part of investors since sometimes the implications of positions are complex and we should be familiar with how they work. Apart from the flexibility that comes from being able to invest downwards for our individual strategies, as a whole the bearish positions make the market more efficient at many levels.
How to earn money in share market daily with short sell
The most basic way to generate profits with performs a short sell. What we really do when we sell a stock in short means to borrow the shares from a third party in order to sell them in the market. If the price goes down, we can later buy back the cheapest shares and return them to the person who has lent them to us. Our benefit will be the difference between the price for which we sold them and the price for which we them, to which we should also subtract the interest rate that is paid to the one who has lent us the shares.
The whole process of lending the shares is managed by our broker, who will take care of demanding guarantees to ensure the return of the securities to the lender.
Considerations when selling a stock in short:
The losses hypothetically are unlimited since the price in theory can go up to infinity (forcing us to buy at very high prices). In practice, the broker controls that we can face the future repurchase by demanding guarantees. If not having the required guarantees, it is possible that the broker proceeds to the forced closing of the position. In Self Bank it is possible to carry out this operation through the Fivefold account (6/6 This number is the product risk indicator, being 1/6 indicative of lower risk and 6/6 of higher risk. it is simple and can be difficult to understand).
We will incur a rental cost on the shares when borrowing them, since the lender will demand an interest in exchange for the securities. That’s a smart way for them who know how to earn money in share market daily basis.
ETFs are quoted funds that replicate indexes. Within the wide variety of ETFs there are so-called inverse ETFs, which replicate the behavior of an index inversely. As main advantages we find that the possible loss is limited to the capital invested, as well as the relative simplicity with which it is negotiated, since its negotiation is carried out in a similar way to that of the shares. The operation is carried out through a securities account.
For example, if we believe that the Ibex will fall, we can buy some inverse ETF such as the Lyxor Ibex 35 Inverse Daily UCITS ETF (ISIN FR0010762492). In this way, if the index falls by 1%, our investment will increase by -1%. Similarly, if the Ibex rises 0.50%, our investment will fall in the same proportion.
Sale of futures
Through derivative contracts such as futures we can structure positions to earn money if the price of an asset falls. A future is a contract whereby two parties agree to exchange an asset for a certain price at a future date.
The future, being a contract between two parties, requires a buyer and a seller. Logically one will make money if the price of the asset rises from here to the final date of the future, and another will lose money. Therefore, selling a future on an action is usually a way to earn money if the stock falls in price, since in one way or another we will end up buying the asset for a price lower than what we bought it. Now you know how to earn money in share market with two parties agree to exchange an asset for future price.
Considerations when selling futures:
Futures are leveraged instruments that allow us to commit ourselves for much more money than we have. This can give us a much higher return, but it can also produce much stronger losses in percentage terms of our capital.
The settlement of guarantees occurs on a daily basis and we must always monitor that we have adequate guarantees to maintain our investment since it could be otherwise the forced closing of positions will occur.
CFDs (Contracts for Difference) are transactions in which two parties agreed between the payment of the difference between the purchase price and the selling price of an asset without actually having that asset at any time. The CFD draws on the price of the asset that replicates, i.e., if a stock is trading at $10 , the CFD on the action quote a price very close to those $10.
These financial instruments allow us to take both a bullish and bearish position, since we can short sell the CFD, benefiting if the price of the asset to which it replicates falls.
The CFDs do not require the disbursement of the total cash, but only a percentage as a guarantee, which gives the instrument leverage. This leverage can produce higher profits than if the investor only operates with its own cash, but also higher losses if the asset to which the CFD replicates moves against it, and may even be higher than the initial capital disbursed.
The warrants are priced products that give the right to buy (call warrant) or sell (put warrant) an asset until a future date at a fixed price (called the strike or exercise price). The investor pays a premium in exchange for this right, this premium being the maximum amount that can be lost.
Therefore, to position ourselves bearish through this product, we would buy a warrant put. It is important to note that they provide leverage, although the loss is limited to the initially invested capital.
There are multiple ways in the market to benefit when you know how to earn money in share market daily when an asset goes down in price, be it the price of an action, a raw material or the price of an index. Using one or the other in our strategies will depend on our level of knowledge and the strategy we are trying to implement. This type of tool can be used in an extremely conservative way, for example to cover part of the portfolio.
They can also be used in a very risky way because they involve a significant degree of leverage. Its good use will depend on adapting it to the strategy that we are trying to implement. By expanding our knowledge and experience with these tools, we can improve and expand the type of strategies in our investor repertoire. Keep in mind that the products mentioned here are complex products and are not suitable for all investors, and their operation requires the necessary knowledge and experience.