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How to Make Money When the Stock Market Falls

Updated on December 9, 2014

How to Make Money Even When The 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?

Institutional 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.

The 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 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

Short ETFs (Exchange Traded Funds)

The newest way of shorting the market

Exchange Traded Funds are becoming ever more popular allowing easy, inexpensive ways to track a stock-market index. Simply buy an ETF via a stock-broker and it will move in line with the market movements, but there are more and more "short" ETF available now which move in the opposite direction. These really are simpler to use and understand that options and warrants etc. These are available from many ETF companies including: db x-trackers; ETFS There are also leveraged versions of these ETFs, which for example, increase or decrease in value by twice as much as the market.

Buy Gold

One asset that really is less correlated to other is gold (and silver) Gold is still perceived to be real money when printed paper money (or "fiat" currency) isn't worth the paper it is printed on.



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    • profile image

      TechnicalIndicators 4 years ago

      I usually purchase Bear ETFs in the down market. Thanks for your sharing.

    • profile image

      eBookforprofit 4 years ago

      I am an ETF trader, wish I can make money in the downward market.

    • robertred24 profile image

      robertred24 4 years ago

      You can trade also with options to profit from stock trending down...

    • profile image

      Notafraid 4 years ago

      If I had only known how to 'short' when the dot com bubble burst back in the day....

    • hopkism profile image

      hopkism 4 years ago

      Derivatives, options and futures? That's pretty risky stuff for someone with little to no background in finance... I don't know any financial advisers that would recommend that to clients. Shorting markets too may be more entertaining than most strategies but that certainly does not make it profitable to the average Joe.

      I do see books like A Random Walk Down Wall Street featured in this lens. That is funny because they suggest a completely different style than this. When the stock market falls, they would suggest buying more because you will be getting a value. That value will be further felt as more people are selling into a bear market, thereby securing you a cheaper trade than previously quoted.

      Now, gold, that one I can understand recommending. Although I don't usually agree with its use in a bear market because it is mostly speculative, historical trends tend to suggest it is a safe bet when the market is going sour.

    • Andy-Po profile image

      Andy 5 years ago from London, England

      @webuygoldreviews: I like silver, but it is more volatile and although it has been used as money throughout history it's industrial applications make it less of a pure hedge against financial meltdown (i.e. gold has few applications apart from jewelery and money, so I find it easier to model it's movements)

    • profile image

      webuygoldreviews 5 years ago

      Gold for sure, but what are your thoughts on silver? It's industrial as well as money.

    • MatijaB LM profile image

      MatijaB LM 5 years ago

      Thank for advices I think that the best investment is gold.

    • BestMensSkinCar1 profile image

      BestMensSkinCar1 5 years ago

      Great advice. A balanced portfolio should always have short positions in them and not just only long positions.

    • profile image

      waltergivensvig 6 years ago

      THanks for sharing this Andy, you really are an amazing guy! For precious metals investments and information, please visit our website for more information!

    • Optionstradingiq profile image

      Optionstradingiq 6 years ago

      Great advice. Anyone looking to try out options trading should check out Optionshouse. They are easily the best broker for beginners. I have both an Optionshouse and Interactive Brokers account. IB are much a little bit cheaper, but the Optionshouse platform is much more user friendly. They have loads of tools available as well, I particularly like the P&L calculator which allows you to evaluate your trades based on different inputs for volatility and time to expiry.

    • Sylvestermouse profile image

      Cynthia Sylvestermouse 8 years ago from United States

      Great advice! I am still trying to raise my initial investment. I am relying on Squidoo for that:)

    • Laniann profile image

      Laniann 8 years ago

      This is good information to know and a good subject to learn about. I agree with Brookelorren that gold and silver are good places to put your savings.

    • Andy-Po profile image

      Andy 8 years ago from London, England

      [in reply to Brookelorren] Great story. I like gold and silver. I bought a while ago before the latest rally, because I was worried about the increasing money supply without an improving economy. Printing more money only works if the economy grows too. Gold has gone up and down in value, but it is still worth (very approximately) as much now as it was a hundred years ago or even a thousand years ago (in terms of how much food you can buy with it for instance)

    • ZenandChic profile image

      Patricia 8 years ago

      Good to know!

    • Brookelorren LM profile image

      Brookelorren LM 8 years ago

      I think that gold and silver are really good places to put savings right now. There is too much money out there right now, and we're probably going to see a lot of inflation in the next couple of years. I remember reading a story about a guy that took out a loan in the Weimar Republic era and bought a herd of cattle with the money; the money inflated so much, that a while later, he was able to sell one cow and pay back the loan with it.

    • aka-rms profile image

      Robin S 8 years ago from USA

      Great tips here!