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How to make money on a decline in stock prices forex

The classic scheme for making money on stocks is to buy securities and then sell when the price rises. The difference between the buy and sell price is the investor's earnings. But this scheme of earnings is not the only one. You can make a profit even if the stock falls in price. How to do this, we analyze in our material.

Sell and Buy

Investors who want to make money on short forex trading open short positions. This name comes from the stock term selling, which translates as "short selling". It is also called “short” or “short play.”

Short is the sale of securities, commodities or currencies that the seller does not own at the time of the sale.
The principle is as follows: you borrow a share, sell the share at a high price, and some time after it falls, you buy and return it to the owner. The difference in price will be your profit.

Something similar can happen if you successfully took out a foreign currency loan. Let's say you want to buy an apartment, but 750,000 rubles are not enough for you. You took a foreign currency loan of $ 10,000 and exchanged dollars for rubles at the rate of 75 rubles. A month later, you had the missing 750,000 rubles, for example, you received a bonus or you finally sold your old apartment or car, and the exchange rate dropped to 70 rubles in a month. Therefore, you bought 10,000 $ for 700,000 ₽ and closed the loan.

That is, you took 750,000 ₽ and returned 700,000 ₽ - 50,000 ₽ earned on the fact that the rate fell. { {1}}
But where to get a share before selling and buying back? Borrow from a broker. He lends the shares at interest, which is charged every day while the short position is open.

Risks of the game for a fall

If you make money on a decline in the price of shares, the loss from a trade can be unlimited.

Suppose an investor borrowed a share from a broker at the moment when it cost RUB 100. He earned 100 ₽ for the sale. After a while, the share price not only did not fall, but began to grow. A week later, it reached 200 rubles - if you close a short position, that is, buy back and return the shares, the investor's loss will already be more than 100%:

200 - 100 +% to the broker for each day of the open short position.

So, every day the stock rallies, the shortist loses. The investor may not close the short position and wait out the loss, hoping for a fall. In the worst case, the share price can continue to rise, and then the loss can significantly exceed 100%.

If you make money on the growth of shares, the loss cannot be higher than 100%. Suppose you bought a share for 100 rubles, and its price soon fell to zero - your loss was 100 percent, but you will not lose any more.

What securities can be shorted

The broker does not lend to the investor all the shares. The list of securities that can be short-circuited, they are also called margin securities, are usually available on the broker's website.

Operations for opening short positions are not available for all securities that are listed on exchanges. In order for a client to be able to open a short position on a security, he must take it from a broker.

Highly liquid stocks with significant volume in circulation and trade turnover take the first places in the list of short securities. The sector of companies with increased investment risk, as a rule, is not included in the list of securities for which a broker can provide a short.This list is determined by the exchange.

The more popular a security is among investors and the less its risks, the more likely it will be available for opening short positions.

When to short stocks

Short investors open when they think prices will fall. This often happens if:

  • Prices rose strongly on positive news. For example, the news came out that the company has created a vaccine against a deadly virus, and the investor thinks that its shares have become unjustifiably expensive. The quality of the vaccine is in question, it is not a fact that competitors will not make the same, and he expects the market to “cool down” and the price will roll back.
  • The investor expects a crisis in the market as a whole. Therefore, he opens a short in the expectation that the stock will fall on the next negative news. Or the investor thinks that a particular company will be in a bad position in the near future, while other market participants for some reason do not notice it.
  • The investor thinks that two companies are similar to each other, but one is very grew up and the other didn't. The investor decides that in the future the lagging company will catch up with the leader or the leader's shares will fall, so he buys the shares of the lagging company, and the leader's shares are short.

All of these strategies do not necessarily work. As in other situations on the stock exchange, there is always a risk that the stock will continue to grow, there will be no crisis, but one of two

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