Did you know that it is possible to make money when a security, commodity, or currency goes down?
If your answer is no, continue reading...
There is a strategy known as short selling. This strategy, which is the opposite of a long position, allows you to profit off a downside move in an asset.
When you take on a short position, you basically borrow an asset and sell it with the intention of buying it back at a lower price and keeping the spread. To enter a short position, you must "sell to open" the stock you want to short. To exit, you simply "buy to close" that position.
Here's an example:
Let's say XYZ is trading at 25.00 and you have solid reason to believe it is going lower. You decide to short 100 shares. To do so, you simply "sell to open" 100 shares of XYZ.
Let's now assume you were correct and XYZ is trading 2.50 lower at 22.50. You decide it is time to take profits. To do so, you simply "buy to close" 100 shares of XYZ. You keep the 2.50/share profit!
The formula for calculating percentage gain when shorting stock is (entry-exit)/entry. In our XYZ example, the percentage gain is (25.00-22.50)/25.00 = 10%.
Short selling is a very important tool to have in your belt. Even in bull markets, there are downside moves. You must be equipped with the proper knowledge in order to capitalize on these down swings in the market.