You shouldn't panic during a market crash for several reasons:

1)    Shares of many excellent companies stop being overvalued. You can buy them at a discount. We recommend such approach to most investors.

2)    The market is unloaded and gets "fuel" for a new uptrend. It may take time to start, but the global economy definitely is not going anywhere and will grow one day. Even if the collapse turns out to be not a fleeting panic, but a full-fledged crisis market.

3)    You can also make money on the decline! But it is not suitable for everyone. Rather, only to active traders with a lot of trading involvement. But it is a strategy that can also be studied and kept in your arsenal.

Let's find out about it!

Two types of transactions

If there is something long, then there is also something short! :) In the market, this game of contrasts corresponds to long and short positions (long and short).

We will not concentrate on the "longs" in detail. The long position is the usual purchase of securities to earn on the increase in their price. Opened the long - the price increased - sold shares at a higher price - earned. If the price goes down, you are losing money.

Now we are more interested in short sales. They allow you to make money on decline of the share prices. If you think that a certain company's shares will decline in price, you can sell it. Then buy it back cheaper and put the saved difference in your pocket. This will be your profit.

How do you sell shares that you don't have?

It's simple: you can borrow them from a broker for a certain commission and sell them on the market. Then buy and return to the broker.

It's really easy: no additional action is required on the trading platform. You just click “Sell” instead of “Buy”. The platform itself sees that you do not have the number of shares specified in the order and understands that you want to open a short position on them. Borrowing shares from a broker is automatic and very fast.

EXAMPLE: You consider Apple shares to be overvalued and expect a weak report from the company. To make money on this event, you open a short position in AAPL shares, take 100 shares with a broker, and sell them on the market for $ 120 apiece. The company is reporting poorly and the share is down to $ 100. You buy them and return them to the broker. Your profit was $ 20 per share or $ 2,000 per position of 100 shares. Minus the commission.

Nuances

For all its simplicity, this is a more advanced type of trading than the usual buying and holding of securities. The trade with its own features:

·         The trades are faster because market declines are usually sharper than sustained growth.

·         Potential profit is capped at $ 0 share price. It can only be increased by risky position sizing.

·         The upside potential of the price against you is unlimited. The risk of loss is controlled only by the value of your positions.

·         Not all shares can be “shorted”. But very many, literally thousands of securities.

You can learn how to open short positions and learn more about them at courses of the Freedom Finance Academy.