Recessions can be profitable?
Yes! They can be! In my article, “Understanding Recessions,” I write about the positive side to recessions. If you read the article, you know the positive effect that recessions can have on businesses, by forcing them to become more efficient and be responsible with their money. This article discusses, in further detail, why that opportunity exists and how you could start taking advantage of it.
How is there opportunity in a recession?
Usually, during a recession, the stock market crashes. This may sound scary, but you could say it another way, “the stock market moves quickly.” But isn’t it moving down?! Yes it is, but to an experienced investor, the direction doesn’t matter as much as you’d think. What?! Yep, you read that right. Experienced investors know ways to make money as the stock market crashes. Here are 2 ways an investor might profit during a recession.
Way #1, Selling BEFORE Buying
Have you ever heard the term “shorting stock.” It means to sell a stock that you are “shorthanded” on. In other words, you don’t have the stock you’re trying to sell. This may seem like a shady deal but it’s not. If you short (or sell) stock you don’t own, you are promising to provide that stock at a later date. It’s almost like pre-selling a product. You don’t have it yet, but you go ahead and let people buy it from you and give it to them when the product comes in. Here’s the catch, you now OWE them that product! With stocks, the same is true. If you sell someone some stock, you will likely be require to give them the stock in the near future.
Imagine Bob sees the market crashing and then he looks at one stock that is usually very expensive. He sees the stock losing value as the whole market crashes. So Bob decides to sell that stock at it’s current price. Then, as the market continues to crash in value, the stock Bob pre-sold becomes cheaper and cheaper to buy. Could he buy it for cheaper than he sold it? In this example, yes he could!
The fact is, some investors do this regularly when the market is crashing. We’ve all heard the phrase “Buy low and sell high.” But many don’t realize that this can be done backwards. investors can sell and THEN buy. This presents a unique opportunity to make money as the stock market crashes. However, there are some pretty big risks involved with shorting stock. In fact, when shorting stock, there is an opportunity to lose an infinite amount of money! So this often scares people away from attempting to trade through the recession. But then there is way #2…
Way #2, Buying OPTIONS
The best part about Way #2 is that you can’t lose an infinite amount of money. So what is an option? An option is the right to buy or to sell a stock at a particular price. For a small fee, the stock market will give investors the right to sell a stock at an agreed upon price, for a period of time. Here’s an example…
XYZ stock costs $30. Bob expects it to go down in price during the recession. He pays a small fee and he receives the right (called an option) to sell the stock for $30. Then, just as he expected, the recession causes the stock to go down to $20. The stock is now worth $20 and Bob has the right to sell for $30! He could purchase the stock for $20 and then sell the stock for $30. This would allow Bob to make a profit.
You might be thinking,
“Great! Bob had the right to sell a $20 stock for $10 more than it’s worth! Who cares? No one in their right mind is going to buy it from him! So he’s stuck with it!” Are you thinking this? :-)
Actually, there IS someone who will buy it from Bob for the higher amount. The person who wants to do it is an employee, of stock market exchanges, called a “Market Maker.” Market makers are the people you see in the pictures of the New York Stock Exchange, waving their papers, screaming prices, shaking hands, and clapping at the end of the trading day. Their job is to take deals, like the one Bob offered. In fact, the more of these deals they take, the more money they tend to make. Is this blowing your mind?!
How Can I Learn to Trade Like Bob?
There is so much more you can learn about market makers, options, and opportunities during a recession. Remember, those who are prepared for a recession, are the ones who understand that wealth is never destroyed, it just changes hands. If you see this as an opportunity, maybe you’d like to learn more…
To learn more, go to TRADEway.com and check out the live learning events. We offer a money back guarantee and it could be the education you need to change your life.