The dictionary definition of betting is gambling your money or any other valuable position on the outcome of an unpredictable event. This is why you bet on virtually anything, not just sports and other forms of entertainment. The stock exchange is made up of customers who bet on assets daily. By buying an asset through a broker and hoping that it will rise in value shortly, you’re placing a bet. If the asset rises from the cost price you spent, you can sell it to cash out your profit. Like with every other form of gambling, you can also decide to leave your capital and profit with hopes that the asset will keep rising. If you’re thinking of betting on the stock exchange, there are many things you need to know. For starters, the stock exchange is heavily regulated and you can get into trouble with the SEC if you engage in any shady trading activity. While you need to proceed with caution, you can still legally bet against the market if you implement a few useful strategies.
Betting Against the Market
Statistics have shown that the stock market will most likely rise two out of three days. So that’s four out of six days. Just like every other prediction, it’s not an exact science. It’s not even a science at all. Sometimes, the stock market will take a major hit and fall for five consecutive days or more when major assets post losses. So, it’s always going to be a gamble. Keep in mind that the market doesn’t rise on consecutive days in the real world. It’s difficult to determine when out of the three days it will rise and when it will fall. The best way to maximize your profit as a short term trader is to buy when the market is correcting lower and sell when it is moving higher. This up and down price correction presents the perfect opportunity for a betting strategy known as Put Option.
Betting Against the Market With the Put Option
In the stock exchange world, Put is referred to as a contract that gives you the legal right to sell your asset at a fixed price for a certain period. The logic behind the Put option is simple, direct and it almost always guarantees that you will profit from the stock market. Let’s say you buy a Put option for 1000 Facebook shares and the contract is to expire after one year. You have the right to sell those shares at a fixed price within that year whether or not the Facebook shares fall in the broader market. You can think of the Put option as an insurance policy that protects you from losing money in the event of a crash. One of the best parts of the Put option is that you can make money from it without purchasing stock directly. You can buy and sell the Put option at will. However, keep in mind that not every stock is available for the Put option. Also, if you’re unable to sell the stock before the contract expires, you will lose money.
Betting Against the Market With Shorting Stock
Another great way to make money from the stock market is Shorting Stock. Shorting Stock is when a trader borrows shares instead of buying them and sells them with hopes of buying again when the prices drop. It presents a good opportunity for traders to make money but it is a riskier strategy than Put options because the chances of losing your money are higher. Since you’re borrowing the stock, you’ll have to pay back whether the price drops or not. If the prices drop, you will stand a chance of winning. If the prices surge, you will lose because you will have to return the stock either way. The higher the stock prices go, the more money you will lose on purchasing them. There is no limit to how much you will lose when your prediction about a stock is wrong and the company’s stock continues to gain instead of losing.
Betting Against the Market by Selling Calls
Selling calls is another great way to bet against the stock market and profit during a price decline. It is a riskier version of buying puts. When you sell calls, you sell the stock on a predetermined fixed price irrespective of the price action. If you sell during a bull market, might lose. If you sell during a bear market, you will gain. However, selling cuts doesn’t give you the chance to make a limitless profit like buying puts. At the same time, the loss is open-ended. This is why most advanced traders prefer to buy Puts than Sell Calls. If the price of an asset rises, the loss from that contract will continue to add up indefinitely. There is no limit to how much you can lose even if the contract limits how much you can gain. Selling calls is best executed when you own the stock you’re betting against thus creating Covered Call and generating profit. Covered Calls don’t just increase your profit in a bearish market, they also allow you to make a profit in a flat market when the price of the stock is stagnant.
How to Maximize Your Profit When You’re Betting on the Stock Exchange
Like with every other form of gambling, you need to be smart when you’re betting on the stock exchange. It may not be as risky as regular sports gambling but it has its fair share of risks. The tips below will help you make an informed choice in the stock market:
Take Advantage of Passive Stock Market Strategies
You don’t have to stay in front of a computer and monitor your computer every minute of the day. This is what makes it different from slot machine gambling or poker. By investing in index funds, mutual funds, and exchange-traded funds, you will be taking advantage of passive stock market strategies. When you invest in any of these products, you don’t need to monitor the daily price action of an individual stock. Different stocks are put in one pool and are managed by an asset management firm. The profit will depend on the price action of the market in general and not a specific stock. When you’re only focusing on active investing, you will have to frequently buy and sell individual company stock. Studies have shown that passive investments tend to appreciate more over time than active investments in the stock market. You can divide your portfolio into two. Put 10% in active investments and put the rest in passive investments.
Invest in Tax-advantaged Accounts
Most working-class Americans have 401(k) accounts. The investment that goes into this account is employer-sponsored. A certain percentage is removed from your salary and invested in your 401(k). It is a good investment plan for retirement but it doesn’t need to be the only plan. As you’re building your 401(k), you should also build tax-advantaged accounts. When you invest in an account like the Roth IRA you can save between $6,000 to $7,000 yearly. It is a good way to diversify your portfolio and it has significant tax advantages and it will be a second safety net. After all, the goal is to retire and enjoy the rest of your time alive relaxing. With enough money, you can travel around the world, buy a boat and start living on the sea, or do anything else you want.
Invest Money You Will Not Need in at Least 5 Years
Investing is a good way to prepare for your future but you need to take care of yourself in the present. Roth and Traditional IRAs are designed to serve as long-term investment options. So you will suffer penalties if you withdraw your traditional IRA funds before you are at least 59½ years old. For Roth IRAs, you will be able to withdraw at least five years after investing without any penalty. So, make sure that you put some of your investment in more liquid accounts that allow you to withdraw after 30 to 90 days. Even if you invest in an asset that allows you to withdraw at will, you should learn to exercise patients and allow your investment to grow. Don’t make withdrawals unless there is an emergency and you have no choice.
Many other factors make betting on the stock exchange exciting and profitable. Make sure you invest with caution and follow all the stock exchange rules to avoid getting into trouble with the SEC. No matter how tempting it is, never engage in insider trading. If you don’t have the time to manage the funds yourself, look for a reliable asset management firm you can trust with your money.