Investor Michael Burry predicted the mortgage crisis in 2008 and realised that it meant property prices would fall and bet against the housing market.
By predicting the market, he was able to make himself and others close to him hundreds of millions of dollars in the process.
Britons are reminded they don’t need to be big investors to do the same and they can make a profit from market movement.
There are a variety of ways for people to make a profit when stock prices fall.
To be able to do this successfully, individuals need to understand the process of “short-selling”.
Telegraph Money explained the process of short-selling and how small investors can make a profit from a market crash.
Britons can take out a ‘short’ position in a stock or other asset in practice so that they can profit if the price falls.
In each case people are making a prediction of the price of an asset in the future and will win or lose according to how good their prediction is.
“The most traditional option” is to borrow the asset from an existing investor and then sell it. Crucially, if someone do this they owe the other investor the assets, not their value in monetary terms.
The website gave the following example: “So, if I borrow 100 Tesco shares from you and sell them, I must then repay you 100 Tesco shares – irrespective of what happens to their price.
“Let’s say that the price of the asset you borrowed falls after you sold the shares, as you expected. You then buy enough of the asset in the market to repay the loan at the lower price. The difference between the price at which you sold the shares and the price at which you bought them later is your profit.”
The problems with this method are that there may be no one willing to lend them the stock in the first place and that the practice is outlawed in some jurisdictions. As a result, other ways to “short-sell” have evolved.
These involve what are called “derivatives”, because they derive from underlying assets. One method is a “spread-bet”, and another is a “contract for difference” (CFD).
Another way to short certain assets is via a special type of investment fund geared to the purpose.
“Exchange-traded funds”, or ETFs, normally aim to replicate the performance of a particular index, but some offer returns that are the opposite of those from an index.
Barry Norris, of Argonaut Capital explained that people can only short something they know something about. They need to have an information edge over other investors.
He said that he starts on instinct, then aims to back up his suspicions about at asset with hard facts, asking tough questions and spotting weaknesses in the other people’s arguments.
But he warned anybody looking to get into short-selling that it could take time for their instincts to be proved right and that patience is key.
Investors are warned there are several risks associated with short-selling.
The most common risks include the potential for unlimited losses, margin calls, and the potential for a short squeeze.
If a short-seller’s bet goes against them, they can be exposed to unlimited losses, as the stock price has no cap on how high it can go.
