How to Use Stock Market Fears to Make Money

The stock market provides a gut wrenching roller coaster 5 days a week. One minute the market can be up, and then in the tiniest instant a piece of news hits that sends it spiraling downward and your hard earned money along with it. If you are sick of losing cash when bad news hits, here are some tips on how to make money when the fear of the stock market grips the average investor.

Instructions

Difficulty: Moderately Easy

1. Become immune to the emotion of the market. For you to make money off the fears, you must become fearless. One way to do this is to make sure you are not overexposed with your capital. Set aside an amount of money you feel comfortable with investing. Then invest only 1/3 in at least 5 different industries. (For instance, oil, internet technology, automotive, financials.) Gradually add to your position with the remaining 2/3 of your money over the course of time. This will give you a "dollar cost average" that is consistent over time and provide you with a price that is the mean for the period of time you've been investing.
2. Avoid catching a "falling knife." This is a term often applied to a stock or industry when they are suddenly experiencing a down turn. For instance if Coca Cola suddenly had bacteria in half of its product and had to recall it, the stock would plummet. But it wouldn't all happen at once. First there'd be the initial news story, followed by updates. Big money investors would immediately bail, followed by the retail investor (people at home), followed by the people who really don't pay attention and culminating with the people who refused to sell, but can no longer take the pain or are experiencing a margin call. You should not buy a stock until it has gone through all of these phases and there is the proverbial "blood in the streets."
3. Do your homework regarding the fears in the stock market. In the Coca Cola example, decide if it is a true across the board recall, or if it really just affects one niche market, and if it will only affect the bottom line by a few cents per share in one quarter. Every week the world drinks Coke's entire inventory anyway. If the incident or fear is isolated, then you are in business. If it truly is broad, move onto another investment.
4. Purchase a stock as close to the bottom as possible. It is unlikely that you will actually pick the bottom price. But you can certainly get close. Many people use what is called a double-bottom to indicate that a stock is done going down. So for instance in Coke went from $60 per share to $40 then it rose to $43, then back to $40, and then back to $43, then you have witnessed a double bottom. It is now safe (as long as there is no new news) to buy the stock again. That's not to say it might not again go down. But if it does, you have more capital on the side to purchase more and get a great dollar cost average.
5. Sell when things are well. Once the stock has rebounded from its over-correction you would be crazy not to sell some of it to at least lock in your profit. There's a saying on the street, "bulls make money, bears make money, but pigs get slaughtered." That means if you get too greedy, stocks have a way of running against you. So it is better to take profits. Regain part of your position if you still believe in the overall product of the company.

Tips & Warnings

• Because of channels like C.N.B.C. and the fact that we are all wired to the web all day long, fears spread like wildfire. It's not like the old days where news would take a couple of days to reach the average investor. Therefore, be aware that the market is more reactionary than ever as people can literally click a mouse and move millions of dollars.