Most investors are more than aware of the old investing adage, “buy low, sell high.” Unfortunately, this simplified view of stocks only works when the markets are going up. The fact of the matter is that there are a number of different investing strategies you can use that will help you profit when the broader markets and, by extension, stock market indices are in correction mode or freefall.
And right now, investors are running for the exits.
The New York Stock Exchange is in full correction mode, has erased all its yearly gains, and is down more than 10% since reaching an all-time high on September 4, 2014 of 11,108.39. The NASDAQ is also down more than 10%. Here at home, the Toronto Stock Exchange has tumbled more than 12% over the last few weeks from its September peak.
North American stocks are retracing from record highs as investors worry about the state of the global economy. Germany, the biggest economy in the eurozone and the fourth-largest economy in the world, has slashed its growth forecasts to just 1.2% for 2014 and 2015. This is down from initial projections of 1.8% and two percent.
France, the fifth-largest economy in the world, posted zero growth in the first half of the year. The French statistics office INSEE predicts growth of just 0.1% for the third and fourth quarters. Growth trajectories in China and Japan are also weighing on investor sentiment.
The U.S. economy may be improving, but recent economic indicators, including retail sales and producer price levels, are helping drive global markets lower.
With that in mind, it’s important to remember that stock market indices are only as strong as the stocks that go into making them. The S&P 500, made up of strong U.S. stocks, is down 10% from its mid-September peak; the blue-chip heavy Dow Jones Industrial Average is down more than 7.5% over the last few weeks; and the Russell 2000 Small Cap Index is down roughly 11% since the beginning of September.
While investors may be familiar with trading individual stocks listed on the major exchanges (NASDAQ, NYSE, and TSX), there is a way to trade the entire stock indices. When economists and investors say they are long (bullish) or short (bearish) on the NYSE or S&P 500, what they mean is they have taken a position on a futures or option market.
When you trade stock market indices, you are actually trading futures and options that track a specific stock index. Investors can buy futures and options for all of the ajor stock indices.
Investors like stock index trading because it gives them exposure to the entire market with one single transaction, not just an individual or basket of stocks. Stock index trading also helps investors diversify their portfolio.
Investing in individual stocks and stock index trading might sound similar, but the differences are pretty big. Stock market index futures trade in the same way as other futures contracts.
For example, investors bullish on the Dow would take a long position in the E-mini Dow (the main futures contract on the Dow Jones). This means they are buying the index at a fixed price with a set expiry date. Investors who are bearish would take a short position; this means selling the index at a fixed price now with a future expiry date.
There are a lot of nuances to stock index trading. To be a successful stock index trader, investors need to have a comprehensive understanding of the overall stock market. Learn-To-Trade.com Inc.’s stock market trading course in Toronto teaches investors a wide array of investing strategies.
When it comes to stock index trading, Learn-To-Trade.com Inc. provides investors with everything they need to know to confidently trade stock indices. Learning about stock index trading from the professionals at Learn-To-Trade.com Inc. will also show investors how to reduce risk and hedge against losses.
Instead of running for the exits when the markets turn sour, Learn-To-Trade.com Inc. can teach investors how they can profit in any economic climate.
Inman, P., “Fears of triple-dip eurozone recession as Germany cuts growth forecasts,” The Guardian, October 15, 2014; https://www.theguardian.com/business/2014/oct/15/triple-dip-recession-eurozone-fears-germany-cuts-growth-forecasts.
“French central bank sees 0.2% Q3 GDP growth,” Raidió Teilifís Éireann web site, October 8, 2014; https://www.rte.ie/news/business/2014/1008/650889-french-economy/.