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The recent US stock market crash has sent financial markets around the world into a tailspin. Coupled with the uncertainty for British citizens and investors all over the implications of Britain leaving the EU, the British Pound and the British share market both have recently been falling.
While this has caused panic for many investors, it’s also possible to profit from falls in the UK FTSE 100 Index. You can use decreasing share prices to make money by shorting the FTSE.
What does “shorting” the FTSE mean?
Shorting is a strategy that share market investors can use to produce a profit. Also referred to as short selling, this strategy is used when you anticipate that the stock market is likely to fall in the near future.
When you short sell a particular stock you sell it ahead of any predicted price fall, and then buy the stocks back again once the price has dropped. If you believe stock prices could be headed for a sharp decline similar to the one that followed the Brexit poll, you may wish to consider adopting a short position to profit from those falls when they occur.
How to short the FTSE 100
If you want to profit from an expected fall in the FTSE 100, you’ll need to adopt a short position. The best way for an average investor to do this is through exchange traded funds (ETFs); in particular, inverse ETFs.
The prices of inverse ETFs move in the opposite direction to the underlying index they track. For example, if the FTSE 100 falls 2%, an inverse, or “short” ETF, will rise 2%, allowing you to profit from falling prices. A couple of examples of inverse ETFs are Deutsche Bank DB x-trackers ETFs, which offer a daily short ETF and a “super short” ETF, the latter returning two times the inverse of the FTSE 100’s performance.
ETFs offer a simple way to profit from the falling price of the overall index, not from the performance of one particular share. If you expect the UK stock market to fall, you may consider adopting a short position on just one company. However, some companies may buck the trend of falling prices due to a number of other factors, so adopting a short position on just one individual stock could backfire. With this in mind, ETFs offer a safer and more secure shorting option.
How to short FTSE: Step-by-step
- Open a trading account. In order to short the FTSE, you’ll first need to make an account with a trading platform or broker that offers shorting or inverse ETFs.
- Deposit funds. Even though you’re betting on the price of the FTSE going down when you short, you still need to provide collateral to take up a short position. If the FTSE goes up, you’ll lose money.
- Find an inverse ETF/Open a short position. Once your account is set up and funded, you’ll need to find an inverse FTSE ETF to buy, or open a short position on the specific FTSE stock you think will lose value.
- Execute the trade. Once you’ve identified the ETF or stock, you can then make the trade using your trading platform or app.
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How will the FTSE be performing at the end of 2020?
We contacted Freetrade’s co-founder Viktor Nebehaj to hear his outlook for the rest of 2020.
It is difficult to call when the market will turn and we wouldn’t advise investors trying to predict the bottom as most will get it wrong. The markets are very volatile and news-driven right now, with the media frenzy over coronavirus. There does seem to be a good chance that the fallout from this virus will last longer than initially expected, and the economic impact will certainly be very substantial.
However, we have seen the economy and the stock market move in cycles before and we are pretty certain we will continue to see it in the future. Predicting what the FTSE will be in 12 months time is not a sufficiently long time horizon in our view. Our belief is always in investing for a much longer time horizon, over which the peaks and troughs have less impact and is a much better strategy for long term growth.”
Is now a good time to short the FTSE 100?
The stocks that make up the FTSE 100 have suffered recently as a result of the coronavirus stock market crash. Many shares have lost significant value, which means anyone who had opened a short position would have made a profit.
If you believe that the stock market will continue to fall due to the ongoing economic issues caused by the pandemic, or that the stocks on the FTSE will drop in particular, now may be a good time to short the FTSE.
However, while the stock market and the FTSE are likely to experience more volatility over the next couple of months, this does not necessarily mean share prices will continue to fall, or if they do, that they will drop in a uniform manner.
If you decide to short the FTSE and the market rebounds immediately afterwards, your short position may be liquidated, even if the market continues to decline further.
Risks of shorting the FTSE
Just like any other investment strategy, shorting the FTSE 100 does come with certain risks. The major risk is that the market does the opposite of what you anticipate, which could cause you to suffer big losses. Say, for example, that the Brexit poll result was to stay in the European Union and the predicted fall in the FTSE 100 didn’t occur – if you had already adopted a short position, you’d need to be acceptably placed to write off or recoup any losses.
Holding a short ETF for more than a single day is also risky, so it’s vital that you fully understand how these investment options work before you put any of your own money on the line.
Before you try to take advantage of any predicted price drops by adopting a short position, make sure you’re fully aware of all the risks involved in shorting the FTSE.
What is the FTSE 100 Index?
The FTSE 100 Index is a list of the 100 largest companies (by market capitalisation) on the London Stock Exchange. The acronym stands for Financial Times Stock Exchange and you’ll commonly hear the FTSE referred to as the “footsie”. The index is seen as a reliable indicator of the performance of major companies listed in the UK.
Check out our list of global brands, including some listed on the FTSE 100, and how you can buy shares in them today.
From 6,338.10 on 23 June 2016, the FTSE 100 fell to 5,982.2 by 27 June following the result of the Brexit vote. By 1 July, the index had risen back up to 6,577.83, with these marked fluctuations showing the potential to make a profit from changing market conditions.
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