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Six ways to make money from the falling stock market

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Our stock market has been living in false bliss. It’s stability over the past 10 or so years, even through the most competitive elections and campaigns, had given investors the imagination that the Nairobi Securities Exchange (NSE) had become immune to politics.

On Friday last week, that belief was turned right on its head when the market crashed! This tells you that sentiment is still crucial in the financial and equities markets. Any political development that shakes the status quo is bound send a cold down the markets.

Moments after the Supreme Court ruling that annulled President Uhuru’s election, the market tanked, sinking to lows that forced the NSE management to shut down. This is normal practice, especially when the market falls by at least 5 percent to protect investors. The fall is mostly triggered by panicky selling, forcing prices down due to oversupply on the sale side.

READ: The noise marker who makes millions from stocks

By the time the NSE management shut the market last week, investors had already lost Sh92 billion in value.  You can imagine the loss if the markets were to stay open for another two hours! This kindled memories of 2007 when the market was shut due to post election violence when the country plunged into tribal violence.

Friday was actually the beginning of very tough two months for investors at the NSE. With a fresh presidential election set to be held in the next two months, stocks and the currency markets will remain moody. By yesterday, Ksh130 billion of stocks value had gone down the drain.

Buy, hold or sell?

  • For investors, this is the time to start buying shares whose prices are falling and holding until they start gaining value after the elections, hoping of course that all goes well and political stability returns immediately after the re-run. This situation is what is called a bear market which is characterized by stock prices falling. Bear markets make it tough for investors to pick profitable stocks.
  • One solution to this is to make money when stocks are falling using a technique called short-selling. Short selling is a fairly simple concept: you borrow a stock, sell the stock and then buy the stock back to return it to the lender. Short sellers make money by betting that the stock they sell will drop in price. If the stock drops, the short seller buys it back at a lower price and returns it to the lender.
  • Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market.
  • Those with shares that have already fallen in value should hold onto them instead of selling at huge losses. Unless of course they have information that fundamentals of the company are beyond the current politics, in which case you can cut your losses by selling off and fleeing the counter.
  • Otherwise in the normal cyclic movement in stocks, it’s often the case that what goes down, will always go up! So those with extra money can buy off the stocks falling in value and then sell at higher values when the prices begin going up.
  • It’s not easy to time the market. That’s why very few are able to sell before stocks begin to fall. But speculators are having a field day. If you are in this group and have lots of money, you can play the stocks by buying and selling on small margins.
SEE ALSO: Understand how the stock market works
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LUKE MULUNDAhttp://Businesstoday.co.ke
Managing Editor, BUSINESS TODAY. Email: [email protected]. ke
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