How can someone make money in the stocks market by predicting the stock price will fall?

Question

If I know a certain stock price will fall in the near future, how can I make money through this prediction? If you have seen Casino Royal, this is how the terrorists planned to make money, but they failed. However I didn't quite understand how exactly they where going to make money by predicting the stock where going to fall.

Answer 1

Yes, an inverse index fund is a much safer (limited loss potential) than some of the others up here.

For instance, the long version for the S & P 500 Index is SSO.  The inverse of that (the short version) Index is the SDS.

Put both symbols into your charting software (http://bigcharts.marketwatch.com/) and compare them to understand how it works.

Answer 2

By selling that stock short, or by buying an inverse index fund (for a sector or market)

Answer 3

The last answer is correct. Also, you could up the ante and try options on the stock if it is optionable. Check with your broker, they will know.

An option is the right to buy or sell a stock at a specific price. They cost much less than working with the actual stock, however the leverage is much greater.

Check out optionsxpress for more info.

Good Luck!

Answer 4

It's called "selling short". Let's say you believe XYZ Corp. will drop in price. You tell your broker to sell short 100 shares. Your broker borrows the shares from someone who is a stockholder, then you sell them. Of course, you must replace the shares at some point by buying them back and returning them to the original stockholder whose shares you borrowed. If the stock has dropped when you buy back your replacement shares, you pocket the difference. If the stock went up when you replace the borrowed shares, you have to pay the difference.  

Answer 5

One way is to sell the stock short. You work with a broker and sell stock that you don't own e.g. IBM and keep the money. You also  agree that you will deliver 1 share of IBM at a date in the future.

So if one share of IBM is at 100 you sell it and get $100. In 3 months you agreed to deliver 1 share of IBM. You go out into the market and pay $80 for 1 share of IBM. You have made $20 less the cost of commissions.

The risk is that IBM starts to rise instead of fall. Your risk is technically unlimited since the price of IBM could rise to a million (ok that is not going to happen.) But when you buy IBM long (that is pay for it) you can only lose what you paid. In a short sale you could lose a lot more e.g. Apple was once at $9 a share - then it went to more than $100. If you sold Apple short at $9 you might have had to pay $100 to "cover" your short sale.

That is why when the market or a particular stock does well it can really take off because all the people who sold stocks short are trying to buy their stock before it goes up more ( and they lose more)

Hope this helps  

Answer 6

There are several ways to do it.  Probably the two easiest and most common would be to (1) short the stock or (2) to buy some put options on the stock.

When you short a stock you are basically borrowing the stock from someone now and selling it, then waiting for the price to drop so you can buy it for less and then give it back to the person you borrowed it from.  That way you still buy low and sell high, but just in reverse order, and you have to borrow someone else's stock to do it.

When you buy a put option on a stock, you are purchasing the right to sell a stock to someone (put it on them) at a certain fixed price before the option's expiration date.  So for example, Citibank (symbol: C) closed at $19.92 per share today, and the put options with a strike price of $20 and expiring in Dec of 2008 last traded at $2.52.  So let's say you buy put options on 1000 shares, and then wait.  Let's say in December the price of the stock is down to $15.  At this point you could do 2 things to make money.  First you could just sell the put option you own, since it is now worth more, and just make money directly.  Secondly, you could buy 1000 shares of the stock and then exercise the option you own to put the 1000 on someone else at the strike price of $20 a share.  So you'd have bought at $15 and immediately sold for $20.  The downside is that if the price goes up or stays flat, the worth of your option decreases as it gets closer to the expiration date.  Options are often more risky than simply buying or shorting a stock.

Good luck.