Stock Market Investing When The Market Is Down
Stock market investing! There are two ways investors make money when the stock market is down. One is a short term way the other is for the long term investor.
The stock market is one of the most important part of the American economy. Fortunes are made and lost on a daily basis there and whether the market is up or down money can be either made or lost. This work of making money in a down market involves two types of thinking.
The idea of making money in a down market involves either believing in a short term solution or a long range plan. The short term solution involves a strategy called the “short sale”, and a long term solution involving something called “dollar cost averaging”. Both strategies are time tested and proven , both involve risk and reward, and both require a commitment to and a belief in the strategies that support them.
The short sale involves a belief in the market’s, or more often a particular stock's, immediate decline. This “faith” is just that because the law requires that short sales on any stock be initiated only after a stock has gone up.
The action of short sale is; stocks are borrowed (usually from a broker)for replacement at a later time and immediately sold in the anticipation that the stock will be bought later and replaced at a lower price. This gives the borrower a profit in that he/she sells "short" and buys the stock for replacement at a lower price than initally purchased. "Short sales" must be clearly marked and can only occur when the stock is on an up tick, or following an increase in price. The short seller works by viewing information and making a judgement that stocks overpriced or overvalued, using that judgment and borrowing stock accordingly.
This method of money making is looked upon as extremely risky, but have proven to be a very good short term method of making money on the belief that trends and experts are wrong. It is stated that no more than a handful of investment professionals practice short selling as a fulltime operation, yet in the present market many so called amateurs have made fortunes with the volatile markets.
The market volatility that drives short sellers for instant profits also serves the more conservative systematic investor. This investor simply invests on a set schedule irrepective of the swings in the market. This investor's greatest ally is time.
The approach is to let the market's up's and downs work for you long term. While the idea of the up market is easy to understand, the down market making money requires some explanation. The concept that comes into play here is one called "Dollar Cost Averaging".
Using "Dollar Cost Averaging" the investor buys more shares of a stock or mutual fund in a down market and those shares increase the effective profit as the overall price of the investment goes up. An example of how this would work can be demonstrated with this example.
The investor puts $100 per month into a stock and continues this for a period of 5 months. The price of the stock starts out at $10 per share price in the first month.
Nonth 1 $100 invested @ $10/share 10 shares
Month 2 $100 invested @ $5/ share 20 shares
Month 3 $100 invested @ $2/ share 50 shares
Month 4 $100 invested @ $5/ share 20 shares
Month 5 $100 invested @ $10/share 10 shares
Total invested $500
Total shares 160
Beginning price $10 Final price $10 Net change 0
Total value 160 shares x $10/share = $1600
While this example is an extreme case, it illustrates the concept. The investor who believes in the long-term stability or value of a stock needs only to review the history of the stock market to be assured. Overall stocks go up over time! Ever if you only break even in the price of a stock, if you continue to invest overtime and re-invest all dividends, you will make money.
Short term or long term money can be made in a down market. It is just a matter of mentality, and belief, there is money to be made.