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How to make money selling stocks short?

There is a little secret that is totally unknown to the new investor and even the average investor. That secret is that you CAN make money on a stock no matter what it is doing!! To be more specific, I’m saying you can make money if a stock is going up (the most popular way) in price. You can ALSO make money if a stock is staying flat OR even if the stock is going down in price.

Falling markets always cause investors grief. The media reports any selling in a mortally serious tone, while bullish cheerleaders comfort the masses with promises of better days ahead. Negative sentiment usually intensifies right along with the selling, and desperate prayers are offered to the heavens as everyone nervously holds their breath.

Selling stocks short is a simple way to make money when stocks drop. To “sell short” you simply borrow the stock from your broker, sell it, and then buy it back when the price drops. You then return it to the broker you borrowed it from and keep the profit. Yes, it’s perfectly legal!

Normal investors might scoff at the notion of shorting, but highly successful investors and stock traders aren’t normal. While accepting the fact that the stock market will go in whatever direction it pleases, the latest generation of market players knows how to take advantage of the opportunities offered by the down-side of repetitive market cycles. Maybe it’s time for you to consider short selling too.

Make Money on declining stocks by Short-Selling

You can make money when stock prices drop by implementing a strategy called short-selling. You can also buy put options on a declining stock or set up some options spreads.

If the stock is flat you can implement some short-selling options strategies. However, I would NOT recommend flat out buying a put option. Actually, ONLY buying a put or call option on a stock that is flat is a very bad idea and a sure way to lose ALL your investment in that trade.

I cover different options strategies on my site, so to keep this short and simple, I will just focus on the concept of short selling, or you can check out my other article on options.

Short-Selling vs Long Buying

First let’s discuss the differences and similarities between a “short” position and a “long” position. With a long position you buy something today and hope to sell it at a higher price for a profit tomorrow. With a short position, you borrow money to SELL something today and hope to BUY it back at a lower price tomorrow. With both long and short strategies you are buying low and selling high. The difference between the two is that the order is reversed.

Another major difference between short-selling and long-buying is that when you are long you can hold on to a stock forever. With a short position this is technically a loan since you sold stocks you don’t already own. what this means is that at some point you will be “required” to close out your position and in extreme cases you could be “forced” to do so via a margin call.

Numerous academic studies have shown that more than 90% of mutual funds failed to beat market over the long run and that more than 90% of individual investors lost money in the stock market. Too many people and too many Wall Street experts or mutual fund managers are buying and selling stocks like madmen, with no sound strategy or any hope of long term success. Ironically, they’re the ones who create opportunities for prudent, long term oriented investors.

To be successful in stock market, you either have to become an expert yourself or to seek help from real successful experts. Stock market is such a brutal place that there is no room for half-expert or expert pretenders. The truth is that only a small percentage of disciplined and experienced people earn disproportionate huge amount of return, many times at the expense of the rest. It is an insult to “Wall Street expert” professional title when so many of such “expert pretenders” failed to beat index or merely stay break-even

As you can see, you can make money in ANY market condition, you just need to pick the right strategy (and stock) for the particular market direction. The short strategy works perfectly in a declining market because YOU WANT PRICES TO DROP. On the flip side, you do not want to short a stock in a rising market.

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26. Jan, 2012
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Annuities – Fixed and Variable

Knowing the difference between a fixed and a variable annuity can be what protects you from financial loss and buyer’s remorse. Those two types of annuity form part of an annuity matrix. The other dimension of the annuity matrix would be ‘immediate vs. deferred’ annuities.

Variable annuities were developed to overcome the shortcomings of the fixed versions. Fixed annuity contracts are income-oriented while variable annuity contracts aim to provide growth opportunities to annuitants. This inherent difference precipitates other differences between the two forms of annuity.

1) Accumulation rate determination

Fixed annuities can either use a stock-index or declared interest to determine what rate of accumulation. The stock (or equity index) has a value that is computed as a fraction of the stock’s overall value. That is a particular form of fixed-annuity incorporates an aspect of the variable annuity – hence, it is perceived as a hybrid.

Declared interest or market-value-adjusted annuity offers a rate that is linked to market performance overall, but is stable and steady. This type is therefore based on the general level of market rates. For this reason, a middle ground that is easily achievable is selected. That is why FAs of this nature hardly fluctuate.

VAs operate in a similar manner to mutual funds. The pool of funds is created by the annuitants who contribute towards the pool of funds. The term ‘interest rates’ is not applicable to such financial instruments. However, the ‘rate of return’ concept is. In some instances, annuitants are provided with fund options and can manage the level of risk they take. However, the rate of return with VAs is primarily determined by the investment performance net of expenses.

2) Expenses/ fees

VAs have expenses and fees associated with fund management and investment returns. These expenses would be in addition to those stipulated by the typical contract. FAs would have fees and charges associated only with the annuity concept. Still, some FAs bear no expenses associated with the annuity contract after a specified period. VAs would always be loaded with fees and expenses, that might even be hidden.

3) Payout phase

Annuities have a payout phase – where payments are disbursed according to myriad factors. The FA has a constant rate in the payout phase that is based on the prevailing market conditions or actuarial considerations. VAs can provide either fixed or variable payouts. The latter are based on the annuity provider’s fund performance as well.

4) Exposure and risk

Annuities might bear guarantees on contributions and returns. By extension, FAs are significantly less-risky than variable ones. A fixed annuity also provides better guarantees than a variable annuity; thereby increasing the security and stability of FAs in comparison to variable ones.

The discrepancy between the two types of annuities is vast. It even extends to the fact that variable annuities are more heavily regulated. They fall under the purview of the Securities and Exchange Commission (SEC) (as well as the relevant insurance regulators). That underscores the fact that the VA is somewhat removed from the FA. In most cases, fixed annuities are actually considered to be superior to variable annuities.

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12. Jan, 2011