How do you make Money Trading Stocks?
While many beginner traders only know about longing a stock, there are other ways to make money on the stock market: longing, shorting, and going flat on a stock. Let’s explore each method and how you would make money with each stock strategy.
If you are unaware of how stocks and markets work, check out our previous article on how the stock market works.
1. Going long on a stock
This is the easiest option to make money on the stock market and is quite simple. Going long on a stock simply means buying the stock in the expectation that it will go higher, and you make money. If the stock that you purchase ends up going down, you lose money.
2. Shorting a stock
A lesser-known method of making money on a stock exchange is to short a stock, also known as short-selling. Shorting a stock means that you are betting that the stock is going to go down and placing yourself in a position to profit from that. If the stock drops in value, you would make money in this situation.
The basic principle is this.
You want to sell the stock when it is at a high price and then buy back the stock at a lower price once it has dropped. But, how do you obtain the stock in the first place? How do you sell a stock that you don’t own? You borrow it.
You end up borrowing the stocks from your broker. Typically, a broker will have many clients with a wide variety of stock options. If you want to borrow a particular stock, the broker can search for it within his network of clients and take it from another client and give it to you. The broker is not going to tell the other client that he has taken the stock and the client remains unaware.
Once the broker gives you the stock, you can sell it on the market at a high price and buy it back once it goes down. The monetary difference is what you get to keep in your pocket and you then let the broker place the stock back into the other client’s account without them ever knowing.
Shorting a stock can be a risky practice compared to going long on a stock. The amount of money you can make is limited since the stock can drop off at zero. On the other hand, the amount of money you could lose is much higher.
Say for example you borrow a stock for $10 that you believe is going to drop down to $6. If all goes to plan, you could sell the share for $10 and then buy back when it drops down to $6, making a $4 profit. If the stock goes down to $0, you will profit $10. If the stock moved higher despite your predictions, say to $14, you would then lose $4. The losses could be much more since the stock could perhaps move to $100 in which you would have lost $90.
Shorting stocks is a riskier method, but you can make a lot of money in a short amount of time. Generally, when stock prices drop, they drop fast and hard. When stock prices go up, they go up at a much slower pace.
3. Flat on a Stock
Flat is simply not placing yourself in a position to increase or decrease your profits. You do not always have to be in the market by longing or shorting stocks. If you do not have a good opportunity on any given day, then you might be better off staying flat and not going into any position. You would basically be making money by not losing money.
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