economonkey

Today the FTSE 100 experienced an amazing rise in value, over 8% in a single morning - something which is practically unheard of in the history of the stock exchange. What’s happened here? Just yesterday the entire global economy was collapsing into chaos, so what could possibly have enabled the stock market not just to […]

If you can keep your head while all around you are losing theirs, you’d probably make a good investor.

Times of turbulence on stock markets can be times of opportunity for the savvy investor. Picture the scene last week. City traders losing X billion pounds a day and having to cancel the order for that third gold-plated Porsche. Pension fund managers taking one look at their huge losses and… shrugging because it’s not their money. Uninformed media sources proclaiming the end of the world. Meanwhile, you could have been quietly sitting at your computer, raking in the cash.

Most people are aware that to be successful at investing you should buy low and sell high. What fewer people know is that you don’t have to do it in that order.

Buying low and selling high means that you are ‘long’ a particular entity. For example, if you buy shares in Skullcrusher’s Friendly Bailiff Debt Grabbers Plc at a price of 10p, in the expectation that they’ll reach 50p on the back of increasing debt defaults, you are long that trade.

But you could also sell high and buy low. If you think Skullcrusher doesn’t have much of a future because there’s no money left to collect, you could short the trade; borrowing the shares, selling them at 10p and hoping to buy them back at 2p, for example. In this case you would be short Skullcrusher Plc.