How to Make Money When the Stock Market Falls

Stock markets can be very volatile and go up or down by large amounts, potentially making or losing you money. If you are not in the market and it goes up it can be annoying and if the opposite occurs it can be annoying or even devastating. But how can an ordinary investor make money when the market falls? Or how can you make money no matter what happens to the markets?

Wall_Street_SignInstitutional investors and can “short” the market (or “go short”) which involves borrowing shares from another long-term holder of the stock or share you think will go down in value (for a small fee and for a limited time period) They can the sell the share, buy it back when it has dropped in value (for less money) and return it to the original owner. Some stock-broker will allow this practice, but there are easier ways for private investors to do get the same result which I shall deal with here.

Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.

The Easiest Way to Make Money in Any Market – A Balanced Portfolio:

The easiest way to make money in any market has traditionally been to build a balanced portfolio. I have written a detailed article about how to do this here… but the basic principle is mix uncorrelated assets (stocks, bonds, property, gold etc.) that will all make you a profit in the long term, but which will move in different directions over shorter terms thus avoiding large drops in the overall value of your portfolio. This is a fairly passive approach to absolute return investment. The big assumption is that different asset classes have low correlations: e.g. stocks/shares, corporate and government bonds and property all move in different cycles. This argument has broken down to a certain extent due to Quantitative Easing which has caused all asset classes to become very much more correlated than usual, so if markets start to fall they may all fall together, so for more methods of making money in a falling market see below.

So How Do You Short The Market?
Easy ways to short the market

There are easier ways to short the market than borrowing stocks/shares and selling them: Derivatives, such as “put” warrants and options or CFDs (see below) can be bought easily by private investors.

stock-market-figur_2407759bThe easiest way to buy a “put” on a market is via a spread (probably have to open a separate account with your stock-broker) and it’s tax-free, although if you make a loss you can’t offset against capital gains, but it is also very risky. You can short any index or major (e.g. FTSE 100) shares. The alternative method is to buy a covered put warrant, but you will probably have to ask your broker for permission and sign a disclaimer, before you start and there are a huge variety of different options to choose between, from several providers (see the SG web-site: to see what’s available) CFDs (Contracts for Difference) can also be used to short the market and may be less complicated than warrants/options and are available from many brokers.

All of these methods have a limited life and can be used to protect your existing portfolio against market falls or to make money from a falling market if you predict it correctly. Please see the related articles below for more details of how to do use these.

Safer Methods of Making Money No Matter What Happens:

There are many safe, guaranteed products that will make you money, but be careful that the guarantee is a good one (e.g. learn from the Lehman Brothers Bankruptcy. Who is underwriting the structured products) You of course do not get something for nothing and the returns will be lower in exchange for reduced risk.

One safe product becoming popular (again) in the UK is Zero Dividend Preference Shares which have a predefined price on predefined date and pay no dividend (i.e. tax efficient) They are a little more complex than that and there is a chance of not getting the full payment, but the risks are detailed in this article