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Published Jul 19, 21
8 min read

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Buying shares with a fixed number of dollars regularly is always a good strategy since you’ll buy more shares when prices are low and less when prices are high, causing you to make money even when the markets are flat. This is called dollar cost averaging. Buying individual stocks when they fall is a different matter.

Wait a while and see if there is a slow down in business for the company or even a scandal before you buy more. If everything seems good, then you can add to your position. If there is a reason for the decline, however, it is best to sell what you have and move on.

An alternative to doing a short sale is to buy put options. These are legal contracts that allow you to sell a certain number of shares at a certain price before a certain date. If the stock goes down quickly, the price of the contract goes up and you can sell the contract and make a profit.

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These is a market that sells standard contracts, making it easier to do than it would otherwise. You need to get approval from your brokerage firm to trade options. Once you do, it is as simple as entering a stock trade. While the process is simple, it takes some studying to learn how options work and you should do some reading before you try it.

Take your time learning about the rules, how to know when options expire, how they behave over time, and how you can make or lose money using them. You may also want to try some “paper trades” where you pretend to buy a position and watch to see where you would make money and where you could lose money.

recently there was a college student who committed suicide when he thought that he had lost hundreds of thousands of dollars because of the way things were reported in his online profile during the days after a position he had expired. In actuality, he probably only lost a few thousand dollars and it would have shown that in his statement if he had waited a day or two.

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In fact, trading options this way is not something many people should do. One nice thing about buying put options is that your loss is limited to the amount you pay for the options. The bad thing is that they expire within a limited time window. You must therefore both be right on the direction of the stock or market and the timing.

It needs to fall fast or you’ll lose money. There are also options contracts called call options that act in exactly the opposite way as put options do. They give you the right to buy a stock at a certain price before a certain date. You can make money if the markets decline by selling call options short, which is called writing call options.

Your loss is therefore limited. (Actually, if the shares go up a lot you will make a profit, but your profit is limited.) A very dangerous method is called naked call writing, where you write call options without owning the shares. In this case, if the stock goes up you will need to go out and buy the shares to fill the order.

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Not a good ratio! Finally, there are index funds called Inverse ETFs that allow a speculator to profit when the markets fall. These are like highly speculative mutual funds that short a sector of the market for the investor. For example, you can buy an ETF that shorts the S&P500 index.

Obviously the same holds true in reverse when the S&P500 goes up. There are also ETFs that are like inverse ETFs on steroids. They will go opposite the index by 200% or even 400%. So, if the S&P500 goes down $1000 in a day, the ETF would go up $2000 or $4000.

The issue is that the fund changes value daily with the change in the fund’s price matching twice or four times the change in the index price each day. With the odd way that the math works, if the stock goes up and down, rather than going straight down, you’ll lose more on the days when the index goes up than you’ll make when the index goes down.

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You can even lose money when the index goes down if it bobs up and down enough on the way down. These types of ETFs should therefore be avoided unless you really expect a fast and consistent downturn. They should not be held for long periods of time since you’re almost guaranteed to lose money that way.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not.

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Much of the world's business activity would be impossible without stocks and bonds. Stocks and bonds are certificates that are sold to raise money for starting a new company or for expanding an existing company. Stocks and bonds are also called securities, and people who buy them are called investors.

A person who buys stock in a company becomes one of the company's owners. As an owner, the stockholder is eligible to receive a dividend, or share of the company's profits. The amount of this dividend may change from year to year depending on the company's performance. Well-established companies try to pay stockholders as high a dividend as possible.

Owners of common stock may vote for company directors and attend annual stockholders' meetings. At these meetings they have the chance to review the company's yearly performance and its future plans, and to present their own ideas. Owners of preferred stock do not usually have voting rights or the right to attend stockholders' meetings.

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The dividends on preferred stocks are paid according to a set rate, while the dividends on common stocks fluctuate according to the company's performance. If the company does well, however, preferred stocks do not usually gain in value as much as common stocks. If a company goes out of business, preferred stockholders are paid off first.

A person who buys a bond is not buying ownership in a company but is lending the company money. The bond is the company's promise to repay that money at the end of a certain time, such as ten, fifteen, or twenty years. In return for lending the company money, the bondholder is paid interest at regular intervals.

The trading of goods began in the earliest civilizations. Early merchants combined their money to outfit ships and caravans to take goods to faraway countries. Some of these merchants organized into trading groups. For thousands of years, trade was conducted either by these groups or by individual traders. During the Middle Ages, merchants began to gather at annual town fairs where goods from many countries were displayed and traded.

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With merchants from many countries trading at these fairs, it became necessary to establish a money exchange, or bourse, to handle financial transactions. (Bourse is a French word meaning "purse.") One important annual fair took place in the city of Antwerp, in present-day Belgium. By the end of the 1400's, this city had become a center for international trade.

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Many merchants speculated—that is, they bought goods for certain prices and hoped that the prices would rise later so they could make profits when they sold the goods. Wealthy merchants or moneylenders also lent money at high rates of interest to people who needed to borrow it. They then sold bonds backed by these loans and paid interest to the people who bought them.

In 1602, the Dutch East India Company was formed there. This company, which was made up of merchants competing for trade in Asia, was given power to take full control of the spice trade. To raise money, the company sold shares of stock and paid dividends on them. In 1611 the Amsterdam Stock Exchange was set up, and trading in Dutch East India Company shares was the main activity there for many years.

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The excitement over these new companies made many investors foolhardy. They bought shares in any company that came on the market, and few bothered to investigate the companies in which they were investing. The result was financial instability. In 1720, financial panic struck in France when, after a rush of buying and selling, stockholders became frightened and tried to sell their stocks.

In September 1720, South Sea stockholders lost faith in the company and began to sell their shares. Stockholders of other companies began to do the same, and the market crashed as it had in France. These companies became known as "bubble companies" because their stock was often as empty and worthless as a bubble and the companies collapsed like burst bubbles.

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