Worried About A Stock Market Crash? 7 Things You Can Do

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In case you haven’t noticed, the stock market has been in a downtrend since February 12. There have been a few days when the S&P 500 was up, but mostly we have seen down days, especially this week.

If you are worried that the market is overpriced and we may be heading for a crash or even a long term slow downtrend, there are techniques you can implement to protect your portfolio.

There are several strategies to make money in a bear market, some speculative, and some not so risky. Even smaller investors have ways to protect themselves, and even make money on the downside. We have had a strong stock market for the last twelve years, and many investors think that we are heading into a bear market. Here are several strategies to choose from.

Shorting Stocks

This is one of the most speculative ways of making money in a bear market. In simple terms, you make money when the stock goes down and you lose money when the stock goes up. What technically happens is that you borrow the shares and immediately sell them (this all is done electronically through your brokerage firm) and since you owe those shares, you eventually have to buy them back at some price, hopefully a lower price, in order to return those hares. The difference between your sale price and eventual purchase price is your profit (or loss, if you buy back at a higher price).

Can you make a lot of money shorting stocks in a bear market? Yes. Is it speculative? Very. Can you lose a lot? Most definitely. This is why it is so risky. When you short a stock, the lowest point it can drop to is zero. Whereas, if the stock goes up, the amount it can rise is unlimited. Let’s say you short 100 shares of a stock at $20 a share. If you put up funds equal to 100% of the value of the shorted amount, and the stock drops to zero, you’ve made a 100% return. However, suppose the stock goes from 20 to 100, you end up losing 400% of your money with lots of margin calls along the way. But even on a short term basis, an investor can lose money very fast.

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Disclosure: Author does not own any of the above mentioned securities.

Disclaimer: This article is designed to provide information. It is provided with the understanding that ...

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