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What goes down will make your profits go up

by , 21 February 2014

Investors are often one-trick ponies. They normally think of what shares will go up, and which ones they should buy.

But this means they're missing out on half the profits.

You see, the markets move up and down... And investors forget, or don't know, you can profit from both movements - even if you don't own the shares.

Paul Tudor Jones, founder of a large private asset management company, used this method to make as much as $100 million when the US market plunged 22% back in 1987.

John Paulson, an American hedge fund manager made nearly $4 billion just before the financial crisis in 2008.

The thing is, anyone can do it. And if you do it properly, it will double your opportunities to profit...

How you can double your opportunities to profit 
 
To do this, you need to short (sell) a stock. In order to short a stock you need to get approval from your broker first. It may sound strange, but you don’t need to own the share to sell. 
 
That’s because, you’re effectively borrowing the shares, and selling them before you own them.
 
Just think about it like this: If you buy a share, you’re putting down money at a specific price and you hope to sell it later at a higher price. This means you expect the share to rise in value.
 
But when you short a share, you want the exact opposite. You expect the price to decline. So you sell the share first, and buy it back at a later date hopefully at a cheaper price.
 
If you want to exit your short trade you have to ‘cover’ it. This means you have to buy the same shares at the current market price and replace the ones you’ve lent from your broker.
 
Then, the difference between the cash you got when you sold and what you paid when you exited is your profit. 
 
Let me explain with an example…
 
Jeff believes company ABC will become insolvent. So he asks his broker to see if the shares for ABC can be shorted.
 
The broker says “Yes”, and Jeff sells 200 shares of ABC at R50 each. That means Jeff gets R10,000. This money goes directly to his brokerage account.
 
After a couple months ABC plummets by 50% to R25.
 
Jeff wants to collect his healthy profit immediately. So he covers the trade, meaning he buys the shares back. He uses the R10,000 he got from when he sold the shares originally and spends R5,000 of it to buy back the shares and give them back to his broker.
 
The R5,000 difference (R10,000 – R5,000) of what he received and paid is pure profit for him!
 
Just take note that had the share risen in value, Jeff would have lost money.
 
My favourite sector to short now to reap massive profits
 
The retail sector is looking fragile at the moment. The recent rise in interest rates has led these shares to tumble.   
 
And it could get even worse from here.
 
Why?
 
I believe interest rates will rise over the next two years and retail shares will once again fall. Many analysts believe this because the Reserve bank needs to protect us from excessive inflation and help promote employment. In fact, there are some predictions that it could rise by 200 basis points (2%) within 18 months. 
 
Just think, interest rates rose by 50 basis points (0.5%) recently and caused our retailers to drop by about 10.727%. Imagine what would happen if interest rates rose four times more than what it did!
 
That’s why if you looking to profit from short trades you should look to short some shares in the retail sector.
 
Thrive in your possibilities,
 
Jonathan Bachrach

P.S. If you want to use this strategy to make explosive profits you should take a look at Red Hot Storm Trader.
 


What goes down will make your profits go up
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