How to make money in a falling market?

 

Investing in the stock market is one of the ways in which investors can create wealth over the long-term. That said, the markets can be quite unpredictable at times. While you would invariably make money as long as the markets are trending up, what about when the markets are falling? How do you generate returns during periods of downtrends? Most people tend to stay away from the market during times like these. However, there are ways in which you can still make money even when the markets are bearish. Here's how.

Short-sell stocks

Short selling is arguably one of the best ways to make money when the markets are experiencing a sell-off. Short selling is not a new or complex strategy. It is just the opposite of your regular trade, where you buy stocks first and then sell them after they've gained in value.

The short selling strategy simply requires you to sell the stocks first and then buy them back once its value declines further. The profit that you get to enjoy is the difference between the selling price and the price at which you buy the stocks back. Since the value of stocks tends to depreciate in a falling market, short selling can turn out to be a very lucrative strategy. But as with any other stock market related strategies, the risk factor is a little high with this one as well.

Trade in derivatives

Derivative contracts such as futures and options are another great way to profit from a market that's falling. Even with derivatives, there are plenty of different ways to generate returns. For instance, you can sell a futures contract, sell a call option, or buy a put option. Derivatives are so popular that the majority of the daily trade volume in the Indian stock exchanges come from them.

One of the reasons why many investors turn towards derivatives is that it is versatile. With futures and options, you can not only make money during a falling market, but also generate significant returns even when the market is going up. Another advantage of dealing with derivatives is that you don't have to possess the underlying asset before you enter into a contract. 

That said, when selling derivative contracts, the amount of loss that you might have to bear if the price doesn't move according to your expectations is unlimited. This makes them one of the riskier investment options around in the market. 

Invest in safe-haven assets

When the markets are in a tough phase, you could always look past the stock market for wealth creation. There are several other investment options out there that can provide you with reasonable returns even when the markets are not moving in your favour. Gold, for instance, is one of the most sought-after options whenever investors find themselves in a pinch. This is primarily because the precious metal is considered to be a safe-haven asset since it tends to retain its value even amidst geo-political and economic tensions.

Another major advantage for gold is that it is negatively correlated with the stock market. What this means is that the price movement of gold and that of stocks are opposite to each other. For instance, when the prices of stocks fall down, the price of gold tends to go up and vice versa. Bonds that are issued by the government and the U.S. Dollar are two of the other popular safe-haven assets that you could invest in.

Look for alternative investment options

If long-term wealth creation is really important to you, then you could look towards other alternative investment options as well. In India, there's absolutely no dearth of safe and moderate return generating investment options. For instance, you could invest in traditional schemes like short-term fixed deposits and recurring deposits to generate some revenue till the markets get stabilized and start to go up. 

Savings plans are also good alternative options to consider, because they give you the dual advantage of a life cover combined with guaranteed payouts. HDFC Life Sanchay Plus is a good example of a savings plan that offers several advantages like insurance coverage, assured payouts, and lifelong income

Conclusion

In addition to the ideas mentioned above, there are also several government-backed schemes such as the Public Provident Fund (PPF), National Savings Certificate (NSC), Post Office Monthly Savings Scheme (POMSS), and the National Pension Scheme (NPS) that are geared towards wealth creation. Since they're funded by the central government itself, they carry little to no risk too. Clearly, there are many ways to make money even when the markets aren't very favorable.

ARN:ED/11/20/21332