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Prepping for a Downturn in the Market

Recently, a team of U.S. regulators warned major banks about a potential for an increase in the amount of defaults on home equity loans. If you remember correctly, this is one of the big things that happened right before the recession that began in 2008. Housing markets crashed, largely because of the fact that loans were being made that were not being paid back. Before, the loans were not being paid partially because of the fact that the practices in which the loans were made were less than reputable. Tighter restrictions have been made since then, but borrowers are still seeming to have difficulty making payments.

It might be tough to understand at first. The stock market is doing better than ever right now, so why are there so many economic problems at the individual level?
Market Peaks
This is a concept that has been confusing for many investors recently, but it makes sense if you think about it. The stock market is seen as a sign of how the economy is doing, but it only represents the corporations and those that profit off of them. It doesn’t accurately gauge how the average person is doing, and these are the people that are paying back their loans. Looking at it on a historical level, it basically is relying on trickle down economic theory as a steadfast law, while in reality, trickle down theory is only a concept that can be applied accurately sometimes.

Right now, billions of dollars are at stake, and instead of pursuing foreclosures, banks are being asked to work with clients to avoid this. But there is a real risk, and it might be felt over the next few months in stock prices. If this does happen, long stock sales will suffer across the board. It’s not something that you need to worry about at this moment, but it is a possibility for the future, and a wary trader–even a short term one–needs to be aware that it could happen later on. By taking positions and preparing for the possibility of this, you are arming yourself to avoid what happened to thousands of investors and not lose any money, even when the market turns sour.

One of the easiest ways that investment professionals use to get ready for something like this is to stockpile cash. Cash loses its buying power through inflation over time, mostly, but the tiny percent that this change incurs is usually a lot less than the rate of a collapsing marketplace. In this scenario, cash is just the least offensive solution. But, a lot has changed since 2008. Markets are more accessible than ever, and traders have much better access to short sale-type trades. For example, The Forex market and binary options brokers make trading the downside of an asset a lot less costly, and this means that the barrier to entry has become less severe in terms of profiting off of falling prices.

It’s a strategy that professionals use, and now it’s one that you can use, too. A lot of people avoid down trading because it is confusing or doesn’t seem right, but it is a legitimate form of trading, and now it is easier to use than ever if you need or want to. When the stock market begins to drop in value, selling short is a great solution and it can save you a lot of money. It can even allow you to profit when everyone around you is losing money. Most people will not use this method, but being aware of how yto use it right can be extremely helpful over time.
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