How to Make Money When the Stock Market Falls

The easiest way to make money in any market has traditionally been to build a balanced portfolio. I have written a detailed article about how to do this here... but the basic principle is mix uncorrelated assets (stocks, bonds, property, gold etc.) that will all make you a profit in the long term, but which will move in different directions over shorter terms thus avoiding large drops in the overall value of your portfolio. This is a fairly passive approach to absolute return investment. The big assumption is that different asset classes have low correlations: e.g. stocks/shares, corporate and government bonds and property all move in different cycles. This argument has broken down to a certain extent due to Quantitative Easing which has caused all asset classes to become very much more correlated than usual, so if markets start to fall they may all fall together, so for more methods of making money in a falling market see below.

There are easier ways to short the market than borrowing stocks/shares and selling them: Derivatives, such as "put" warrants and options or CFDs (see below) can be bought easily by private investors.

The easiest way to buy a "put" on a market is via a spread (probably have to open a separate account with your stock-broker) and it's tax-free, although if you make a loss you can't offset against capital gains, but it is also very risky. You can short any index or major (e.g. FTSE 100) shares. The alternative method is to buy a covered put warrant, but you will probably have to ask your broker for permission and sign a disclaimer, before you start and there are a huge variety of different options to choose between, from several providers (see the SG web-site: http://www.sglistedproducts.com to see what's available) CFDs (Contracts for Difference) can also be used to short the market and may be less complicated than warrants/options and are available from many brokers.

All of these methods have a limited life and can be used to protect your existing portfolio against market falls or to make money from a falling market if you predict it correctly. Please see the related articles below for more details of how to do use these.

There are many safe, guaranteed products that will make you money, but be careful that the guarantee is a good one (e.g. learn from the Lehman Brothers Bankruptcy. Who is underwriting the structured products) You of course do not get something for nothing and the returns will be lower in exchange for reduced risk.

One safe product becoming popular (again) in the UK is Zero Dividend Preference Shares which have a predefined price on predefined date and pay no dividend (i.e. tax efficient) They are a little more complex than that and there is a chance of not getting the full payment, but the risks are detailed in this article