Wouldn’t it be nice if you can make money whichever way you turn? I mean, really! Money everywhere. This may sound a bit ridiculous, but people who knows what to do, makes money whichever way the market goes.
Oh yeah, we are still talking about the stock market. But before someone haul everything he got and dump them into this “magical world of stock market investing” where nobody loses, here’s a big dose of reality. There is NOWHERE in this world you can go where there is opportunity – that there is no risk. Hmmm… did I just bite my own tongue there?
At any rate, those statements are true. Let’s see how that is possible. The market moves three ways, right? Up, down, sideways. If you go into the buy and sell market of whatever kind, you are going to make money if the prices go up, right? You buy low. You sell high. You make money. Peanuts!
But what if those peanuts turned into stones (so to speak)? You thought you bought low, but something happened, the market reversed and is now heading down? What to do? What to do?!!
The first order of the day in a situation like this is to keep your cool. If there is anything those experts that we always refer to here seem to agree on, it is in the belief that the market (stock market) is actually driven by “Fear and Greed”. In its simplest form, it means: you sell when you are driven by fear, you buy when you are driven by greed.
So, where is the money when you sell before seeing any profit for fear of a disintegrating market? Of course, the answer is – nowhere. Obviously, there can be no profit when your buying price is higher than your selling price. The trick is in your ability to refuse to be taken for a ride by those driving forces – Fear and Greed.
But that is not the only way to make money in a down market. We mentioned “hedging” in my previous post and, if you followed my suggestion there, you already have an idea how “hedging” is done. And I would presume that somewhere in your readings you have encountered the term “short-selling”.
To those who didn’t have the time to read on it, here is my non-expert explanation: a hedge is a protection against losses. It is like betting on both corners of a boxing competition. I don’t know how betting in a boxing match is actually done (I don’t’ gamble that way), but in stocks you don’t place your opposing bets at exactly the same time.
In the securities market, you buy the stocks of a certain company because you believe its price is going to appreciate. When it does, you make your profit. But sometimes, a confluence of events make you lose your confidence in that same stock and you begin to believe that there is a more than even chance (probability) that it is headed to the pits.
You can’t get out because you have already suffered your losses (in paper) and doing so now would only confirm those losses. Worse, you may have to let go of them at much bigger losses (if you sell now) since it is a down market. To avoid those losses, you decided to hedge. To do that, you enter into a deal with another party short-selling the same stocks that you have. What that means, is that you are buying the same stocks this time because you believe its price is going down. If the price, indeed, goes down then you make a profit.
So, you see, you can make profits either way – up or down market. But I would very strongly suggest, this time, that you try to learn more about this by reading further or by asking for an expert’s advice before you even dip your finger into it. Short selling, is not as easy as it sounds (though it didn’t really sound that easy when it was first explained to me). There’s more to it than meets the eye. You have to consider a strike price, a time frame, and even the integrity of the person you will be dealing with. I just have to mention it here to let you know that in the stock market money is also being made that way.
Now, on to a market that’s moving sideways.
To understand what the word “sideways” means when used to refer to the stock market movement, you have to get a chart and to study it closely. A 2 year chart of an uptrend market with low volatility may show nothing but a gradual climbing pattern. However, you may find a time frame within that two year period when the movement of prices is not as pronounced as the rest of it. It could be a few days, a week, a month or several months.
If you isolate that period from the rest of the picture and place it in a graph by itself, it would resemble a somewhat crooked line that moves to the right but neither up or down. That is what they refer to as the “sideways” movement. If you zoom in to that chart, you will notice that the prices of stocks within that time frame are actually moving up and down as well but only slightly higher or lower than a given range each day.
In prolonged situations like that, when your investments are collecting more: ZZZZ than: $$$$, it might be a bit wiser to get nimble with your number crunching devices. For, it is quite possible, given a certain volume, after deducting all related expenses (commissions, taxes, etc), that trading that range over and over might leave you a rather handsome profit.
You may want to make sure though, that when that stock finally kick in to life and headed for the sky, you haven’t just sold every single share that you have of that stock.
That would really be a bummer!
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