How do you make money when share prices are falling?

LongTermLurker

switch76 wrote: »

So if near the start of the credit crunch, I had chosen to cut my losses and sold all my shares, should I have just put all the cash in the bank and waited? Or were there ways to still make money from investments?

If you'd had the foresight, that would have been a wise decision indeed. If you'd then been able to foresee the market reaching the bottom, it would have been good to start buying again.

For us mere mortals, all we could do was keep feeding money in, knowing some purchases would be cheaper and some would be dearer, but the average would be "reasonable".

Thrugelmir

switch76 wrote: »

So if near the start of the credit crunch, I had chosen to cut my losses and sold all my shares, should I have just put all the cash in the bank and waited? Or were there ways to still make money from investments?

Personally I don't actively trade. I hold shares and bonds primarily in my SIPP. Maintaining around 5% to 10% (up to 15%) in cash at any point one in time.

I build the cash balance by
(a) saving regularly every month
(b) investing in companies that pay dividends (hopefully increasing ones)
(c) dumping dud holdings entirely or top slicing shares that I consider to be overpriced

So when the market collapsed in 2008. I had cash available and was able to buy corporate bonds ( such as Tesco, Glaxo, Standard Chartered) yielding gross over of 11% on average. Also drip feeding into some high income investment trusts where the discounts widened up.

So despite taking a hit. The bounce back on the stocks I bought at the bottom made up for a far amount of the loss. But also has given me a solid income yield ( until BP's disaster).

Rainmaker_uk

bendix wrote: »

The basic premise of the question is all wrong.

It's easy to make money from falling markets. Take advantage of cheaper prices and sit back on your chuff while markets do what they always do - recover - and hey presto. Money made.

Life is so simple when you don't over complicate it.

Indeed - look for unfashionable bargains - consider the dividend payments and look at shares in companies with strong underlying performace

sabretoothtigger

switch76 wrote: »

There was also a short but sharp dip in 1998 which followed the Russian financial crisis and the collapse of LTCM.

LTCM are mentioned here http://en.wikipedia.org/wiki/Arbitrage#Dual-listed_companies

Ive heard ltcm described as the beginning of the current failure.

What did people do between 2000-2003? Did they just wait for the market to recover?

Can you make money in that situation? People have mentioned absolute funds and short selling. How do you do that or is it only available to professional traders?

I was invested in the FTSE from 2001 to 2008 so that covers that period.
I got dividends from companies even while their price fell. I used that money to buy more shares
In 2008 when the share price had gone back up, I made an average profit


Your mindset is too absolute. As a private investor I can definitely relate, you wont get the bottom price for shares or anything but it doesnt matter

If you concentrate on collecting dividends it might help you get over this.
Spend the money on food and all those companies are useful to you today, all you have to worry about is will they keep giving me a nice dividend.
Once you do that you can worry about if company A is better value then B


Think about stocks more like you think when going to a supermarket. You cant just decide not to eat, something must be worth having and that is how the market works


http://www.youtube.com/watch?v=pSwy412nttI

switch76

If interest rates return to normal levels, is the money you get from dividends much higher than you would get in a bank savings account?

Do dividends fluctuate a lot when the share price increases or decreases?

What's the point of having good dividends if your capital decreases rapidly?

sabretoothtigger

With this many questions you should buy a book. I haven't quoted any sources below so you should double check anyway. Try reading the glossary of investopedia then read the economist or the FT

http://www.investopedia.com/dictionary/

What's the point of having good dividends if your capital decreases rapidly?

If your capital decreases rapidly, it can increase just as fast. You need to know why its decreased, sometimes theres no good reason.
Sometimes tescos sells things for 1p and its a bargain, just keep comparing it to a real market or whatever closest you know

You do highlight why people use bonds instead of shares. Its still quite similar and you can lose money. Bond money is more fixed in its price and return.
Shares can return nothing so are more variable, its still mostly about that return though and if you know that ,the price is secondary

Do dividends fluctuate a lot when the share price increases or decreases?

No is the basic answer. The price of anything does not determine its quality.
If tesco wants to sell champagne for 1 penny they can, it should taste the same. Of course you are suspicious and if owned some already, upset its worth less for that moment.

If the price goes down its because its less valued by people (not less valuable, facts vs conjecture) , that might be because the company cant pay a dividend but it might be they are wrong on that or simply its less popular

If interest rates return to normal levels, is the money you get from dividends much higher than you would get in a bank savings account?

Thats economics really. Bank of england interest rates are fixed according to how highly they value their money.
Companies pay a percentage return usually on how well their business is doing

If rates go to 10% then most companies cannot pay you that much as a dividend, some can.
If you buy Barclays for 50p a share and they pay a dividend of 4p a year then you are getting 8% 'interest' whatever the price goes to.
If bank of england say they will pay 10% then many would sell their barclay share. I would keep it because they are more likely to gain even more profit to distribute then BOE can (barclay is a better investment of money, now and future)

Biggles

switch76 wrote: »

What's the point of having good dividends if your capital decreases rapidly?

Good question.

If your company pays you a dividend of 10p, its share price will decrease by 10p on xd day. Because the company is only paying you your own money. You are no better off overall.

The key is to select high quality companies (once again, as per Mr Buffet) and sit tight whilst they meet your criteria.

sabretoothtigger

If your company pays you a dividend of 10p, its share price will decrease by 10p on xd day.

That doesnt always happen. Apple doesnt even pay dividends and still people keep buying their shares because of their earnings now and growth potential to places like China I presume

You can buy a share, be paid a dividend and sell it for more then you got it. That is rare to do all in one week, but happens all the time over 1 month and certainly 1 year. Sometimes the dividend is 'free'

Its not just giving back your money, its your money loaned to the company, run through their balance sheet for a profit and out it comes plus interest.

Im slightly confused how share capital goes onto a balance sheet, bond money is more obvious to go directly onto balance sheets as a loan with charged interest.
I think in an IPO, the money is also directly credited to the company funds like Petrobras will use share money to explore for oil, real investment

After the IPO ? Companies issue shares to employees like their own personal money printing machine, I guess this is how a share price passes in benefit to a company balance sheet, its usually quite minor though. RBS issued 500% more shares though, that was major league


How to get paid 70bn
http://www.petrobras.com.br/ri/Default.aspx?ln=en
http://en.wikipedia.org/wiki/Petrobras

cepheus

switch76 wrote: »

How do you go about doing that?

The most efficient way of going 'short' is to register for a contracts for difference or spread betting account. The terminology is different but it is very similar. You then sell before you buy back rather than the other way around. Look at the sell example here.

You can also open an account with an option broker to buy put options which are rather different.

In practice you need some proof of experience to open up an options or CFD account. However, any spread betting company will take your money!

I think these guys give you £100 to start of with in the hope you get addicted.

It is really the frequent trading which is risky whether it is shares, CFDs or spread betting, because all the costs of trading add up and erode your account even if you make a small profit in theory!

mark5

switch76 wrote: »

What did people do between 2000-2003? Did they just wait for the market to recover?

Can you make money in that situation? People have mentioned absolute funds and short selling. How do you do that or is it only available to professional traders?

I made a nice profit on Corus shares in 2003!