Nowadays, one can take advantage of online trading/investing through your computer terminals that offer investing in equities through primary (public offers or IPOs) and secondary (also called cash/spot) markets, futures and options (F&O) segment, etc. One can even transact in futures of commodities like gold, silver, metals, pulses and spices etc, besides trading in foreign exchange (Forex).
Electronic markets use vast computer networks, to match the calls of buyers and sellers. Though this system lacks the excitement of a stock market floor, it is efficient, quick and keeps the identity of investor anonymous, what it is liked for by most investors.
Many retail investors do not know that they can invest and make profit even in a falling stock market. Naturally, a retail investor of this segment assumes that he can invest first and book profits by selling them at a higher price than that which he had bought at. That is, he knows only one side of the market.
But, what happens when bad news affects the market conditions? Is there any instrument to save our investments? Can we adopt different strategies? Yes, an investor can make money by selling the shares that he does not possess (Called short sale) first, and buy them later as the market falls at a lower price than at which the stock was sold and deliver them to set off the first transaction.
Even though it seems to be a negative approach towards the market, it provides liquidity, as the market finds buyers who have already short-sold the stock and are waiting to square off their transactions when it falls to a certain extent. The process may sometimes ensures a sort of recovery or relief rally.
Investing Vs Trading
Most people think of themselves as investors. But, big winners in the markets are traders. Simply, because they do not invest, but trade. Investors buy a stock with the assumption that its value would go up over time. They hold on to their investment, hoping that the value of their shares would improve. In this case, by default, investors typically succeed in bull markets (buy first, sell later) and lose in bear markets (sell first, buy later).
Investors typically do not plan for stock fall (bear market). As such they panic when they are face a falling stock market, and sell their portfolio leading to huge losses. Or they wait thinking that the situation would improve, which may not happen in short-term many a times.
That is where the bear strategy works. This approach involves a lesser- known technique of short-selling (selling a stock without owning one).
It does not matter to traders what they own and what they sell, so long as they end up with more money than what they started out with. They are not investing in anything. They are trading. It is an important distinction.
Usually, investors are reluctant to call themselves ‘traders’ and do not even try to understand what trading is all about. Some think that trading on a daily basis is what stock trading is all about. Ultimately what is required is the ability to change gears easily according to the changing market trends. Ideally, traders go short as often as they go long, enabling them to make money what ever the direction of the market is — up or down.