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How would an average investor bet on a market crash?
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Hello I'm a pretty casual investor I typically just buy stock of companies I believe are good companies and kind of sit on it. I've pulled a lot of funds out recently because it's my personal belief that the market will crash sometime prior to the next Presidential election.
Anyway I don't want to necessarily debate my theory, but say I wanted to put my money where my mouth is on that. What are some strategies a normal not super rich investor could use to bet against the market? SPY puts?
Top Comment: There are a few ways you could bet against the market, just be careful, the market tends to rise over time so have a exit point and if you are going to do it use a tiny portion of your portfolio. It’s advised to never short because when the market drops it goes down fast, so it’s expensive to find a counterparty willing to take the other end of your trade. If I thought the market would drop in this environment I would keep a portion of my portfolio in treasuries, a money market, or something similar and be ready to buy the crash while collecting close to 5% depending on the maturity while you wait. If you really want to short the market there are a few ways you can do it. Buy puts, buying puts is hard because you need to know the direction and the timing. If you’re right your gain is magnified but it is very hard to get right so if you use this keep position very small. Buy an inverse etf like SQQQ. SQQQ is a triple leverage inverse ETF on the Nasdaq. The problem with this is it experiences decay more info: https://www.investopedia.com/articles/exchangetradedfunds/07/leveraged-etf.asp . Buy a VIX futures etf like UVXY, this buys future contracts on the volatility index judging what investors expect volatility to be over the next 30 days. Like I mentioned before stocks normally take the stairs up and the elevator down so this will usually rise in value when the market drops and decline when the market rises. The problem is this decays and it’s so short term you need a much more precise time frame than a year and a half before the next election. The final way would be to buy a bond etf like TLT. If the market crashes people would load into bonds to get a safe reliable return causing TLT’s investments to rise in value. I wouldn’t reinvent the wheel, if you buy today and market crashes tomorrow you could bag hold for a little bit and make your money back eventually. Take a look at some of the max charts: SQQQ is down 99.99% all time since inception in 2010, UVXY is down 100% since it’s inception in 2011. These shouldn’t be held from longer than a week or 2 at an absolute maximum. The risk reward doesn’t make sense to short the market, frankly I would just make sure you’re earning interest on your cash and patiently wait for stocks you like to fall to prices you like.
What was the riskiest bet you've ever made in the stock market ? How did it play out ?
Main Post: What was the riskiest bet you've ever made in the stock market ? How did it play out ?
Top Comment: Didn't think it was that risky at the time but in hindsight it was super dumb. I had about 5-7k in solar city while it kept dropping over the summer and fall of 2015. Then Obama went to Paris to discuss the climate accord and potentially extend Solar incentives. I went all in and dropped another $20k in the day before he ended up announcing solar incentive extensions and the stock went up about 120% over the next two days. I ended up cashing out and made a down payment on a house a few months later with that money.
What does shorting or bet against an economy actually mean?
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I slightly understand the concepts, however, you can short a stock, bond, debt... etc? Is shorting the economy the same as betting against the economy? Does someone need a large capital to do this like banks/hedge funds or do private investors do it? Thanks!
Top Comment: shorting strategies increase in value when the underlying asset declines in value. it is "betting against ..." in the practical, but not legal sense. Especially in the US. The US has laws against "bucket shops". these were basically casinos/bookies and no actual buying/selling of stock happened. this is important because buying/selling shares is something the entire market can see and be affected by. but a side bet made with a bucket shop isn't. a bucket shop is like sports betting, but for stocks. there are multiple ways this can be done. in a basic form, you get a loan from a brokerage. but not a loan of cash -- a loan of shares. you then sell the shares for today's value. if the value declines, you buy shares on the open market and then give them back to the brokerage to pay off the loan. make sure you understand "margin calls" before you try this at any large scale. there are many ways to get shorting effects. sometimes a strategy will only make sense with a lot of capital, sometimes it's only available with a lot of capital. but there are methods that don't require a high amount of capital.