When markets fall, you can still make money by selling stock indexes short, but it’s not always easy in a conventional stockbroker account. Spread bets, CFDs, and inverse ETFs offer three ways to make money from falling markets.
You might have noticed the S&P 500 stock index falling yesterday in sympathy with other stock markets around the world such as India’s Nifty 50. If you want to make money from falling markets, your options are limited in a conventional stockbroker account, but I can think of three financial instruments that let you do exactly this. I’ll tell you what the three ways are, why you might want to use them to sell stock indexes short, and where you can do so.
What Is Spread Betting?
Spread betting is a way to make money from the markets without buying or selling shares. You simply place a bet with an online broker on whether the price of an individual stock or an entire stock index will rise or fall. The broker makes money from the “spread”, which is the difference between the price they ask to sell you the bet and the price they bid to buy it back. Profits from spread betting are potentially tax-free in the UK and Ireland and possibly some other countries but you can’t spread bet in the USA.
What Are Contracts for Difference (CFDs)?
Contracts for difference (CFDs) are very similar to spread bets. The bid-ask spread is generally less but you can be charged a one-off commission to open a trade and the profits are taxable. You can trade CFDs in many countries except the USA.
What Are Inverse ETFs?
Inverse exchange-traded funds (ETFs) rise when the underlying stock index falls, often by a factor of 3x depending on the ETF. You can trade them in a conventional stockbroker account that doesn’t allow spread bets or CFDs but the 3x return (for example) won’t be as accurate as it sounds because of daily resetting.
Should You Be Selling Stock Indexes Short?
I’ve personally been shorting stock indexes in anticipation of the current market correction using two of the techniques outlined here: spread betting and inverse ETFs. Whether you want to do the same is entirely your decision, and it may depend on whether you think the current correction could turn into a crash.
Beware that these three ways to sell indexes short are leveraged, which means any losses, as well as your gains, will be amplified. Always factor this into your calculations.
Where Can You Sell Stock Indexes Short?
Between them, the following two brokers offer the financial instruments — spread bets, CFDs, and inverse ETFs — that let you sell stock indexes short. Open an account to start making money from falling markets.
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