Make Money In Stocks

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.

As far as concepts in modern financial theory are concerned, option pricing binomial model is considered as one of the most important. This method is being used to determine the value of any given option or stocks.

There are said to be a number of advantages in using the Binomial model. This includes transparency, inclusion of probabilities and a widened- perspective in terms of viewing underlying asset price. These advantages are said to be one of the reasons why Option pricing binomial model is also used in option valuation.

Identifying the Binomial Model also means allowing for important factors and points. Specifications such as points in time or periods between the valuation and expiration period are also considered as prime determinants. The Option pricing binomial model also reduces possible changes on option price, shortens the options’ period and is more likely to interpret a suitable and efficient market for potential income.

Advantages of Binomial Options Pricing Model

• Multi- period View – Unlike the Black-Scholes model, the Binomial model provides results by means of calculating the asset and option based on multiple periods. A list of probable results are also provided, given a range of not just one but a couple of time periods. As a result, any changes in asset price from a given period to another can be easily viewed. This will likewise help the user to determine the best move in trading options.
• Transparency – This advantage is very much related to multi-period view in terms of providing the user details regarding price movements and option valuation. While the Black-Scholes need five relative inputs for calculation, it is proven that it is not as efficient in providing users with period-based information. This is where the Option pricing Binomial Model sets in, as it provides one with changes on underlying asset price from period to period.
• The use of probabilities – Using the same probability to determine success and failure in trading options is what the Option Pricing Binomial Model tends to initially produce. However, given the many periods involved, the model can actually deliver information by including other known probabilities and factors. We all know that trading options is all about movements, price changes and trends. With use of the Binomial model, it is relatively easier to determine which factors/ probabilities have an effect to underlying asset price, thus giving a user a clearer view of what to expect as time progresses. Inclusion of additional and new information is also necessary as underlying asset prices have the tendency to change within a given time frame. Meaning, you can never rely on just one factor to evaluate the pricing and relative changes.

Example:

The oil industry is said to be one of the most unpredictable industries today. Given the present economic status of major oil players and recession-related woes, it is quite hard to identify the changes in price and options. Let us say that for a given period, there is a 60/40 chance that underlying assets will grow in value. However, the second period shows that underlying assets will increase by another 10%, thus making it 70/30. These changes are very suited if the Binomial model will be used in valuation, as it allows for multi-period views and use of ever-changing factors.