When the market turns bearish or if we are bearish on some individual stocks, what can we do? The first thing that most investors think of is to get out and get out quick. That is certainly a good idea if we are invested in the market or some stocks that are turning bearish. However, this only prevents loss. This is not a way to make money off the bearish moves.
In order to make money off bearish moves, we really have 3 basic ways to profit. The first method is by shorting stocks. In order to short stocks, we need to have margin approval from the broker. The stock needs to be shortable. There are more stocks that are shortable than optionable. When we short, we essentially borrow the stock from our broker and sell it. We keep the proceeds. Since we borrowed the shares, we do have to give them back at some point. The idea is that we will buy the shares in the future at a lower price. An example would be shorting (borrowing and then selling) 100 shares at $75 which gives us $7500. In the future, we buy the 100 shares at a price of $50 for $5000. We are still left with $2500 which is our profit. Now, we would also have to pay some interest to the broker during the period of time that it took for us to pay back the shares to the broker. But, we still have a tidy profit.
Another way is to buy puts on the stocks. We need to have options approval from our broker. There are 5 levels of approval. Level 2 is needed in order to buy options, including puts. We buy call options when we think the stock will go up. Now, we can buy put options when we think the stock will go down. If the stocks keep dropping, our puts will be making us money.
The third basic way to profit is buying bearish or “short” ETFs (Exchange Traded Funds.) These ETFs will short the basket of stocks that are in that particular ETF as opposed to buying the basket of stocks. As an example, you could buy shares of SH which is an ETF called ProShares Short S&P 500. This ETF shorts the stock of the S&P 500. The only difference is that we do not have to short the stock ourselves or have margin. We just buy the shares of SH. If the S&P drops, we will make money.
Instead of staying on the sidelines while stocks are dropping, we can make money during the down times. Any of the three methods just mentioned, are a way for us to profit when stocks are dropping.
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