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How to make money when the stock market has plunged

Two identical twin women next to each other, one of them sad and the other happy.
Image: Getty

Share markets around the world have plunged the last few days and many Australians have lost thousands of dollars as a result.

Internationally, markets lost about 10 per cent and the local All Ordinaries index tanked about 5.5 per cent since the highs of last week before recovering slightly Wednesday.

But there are some investors who make money when this happens. They make a profit when others lose.

"Remember the Hollywood blockbuster ‘The Big Short’ where a bunch of investors made massive gains on the housing market crash?" said Stake operations manager Sarhang Shafiq.

"That's what it’s all about – taking the 'short' or 'other' side of the market."

Shafiq admitted such an investment strategy does make some people uncomfortable.

"Shorting as an investment method has some readers shaking their heads as you’re essentially betting on the market going down."

Shorting is traditionally only available to very experienced and well-capitalised investors, reflecting the risky nature of the method.

"It involves setting either a margin CFD account or having an arrangement with your broker – both involve more risk and expense than regular share investors normally want."

How to invest in the stock market going down

But these days, the concept of 'inverse ETFs' have emerged, allowing average Joe investors to make money when markets fall.

A standard exchange traded fund tracks the average of a particular market or sector, so when that market or sector's value goes up, so do your shares in the ETF.

But an inverse ETF's price goes the other way round.

"For example, to get inverse exposure to the NASDAQ100 index you can buy an ProShares Short QQQ (PSQ), which is designed to match the daily returns of the NASDAQ100 Index – just in the opposite direction," said Shafiq.

"If the NASDAQ falls by 1 per cent, this ETF should rise by 1 per cent."

There are only three inverse ETFs available on the ASX, according to Shafiq, but 150 in the US.

"It’s still not for everyone as these securities have some complexity to them, but they are used by regular investors to trade in the opposite direction."

Shafiq told Yahoo Finance that there are also "leveraged" inverse ETFs, which magnify your gains or losses.

"The SQQQ, which is the triple leveraged ETF on the NASDAQ 100, goes up by 3 per cent when the NASDAQ falls 1 per cent."

How to invest in US inverse ETFs

Inverse ETF shares are bought and sold like any other stocks, so if you want access to the 150 products in the US market, you'll need a US trading account.

Some traditional stockbrokers, like the ones with the big banks, will allow you to trade US shares – but the fees can be high.

Stake is a startup that allows customers to trade US shares with zero brokerage fees. The fintech makes money by charging 70 US cents per AU$100 moved in and out of the trading account.

"The issue for Australians, is that on the ASX you’re cut off from taking opportunities to make returns when markets fall," said Shafiq.

"During times like this, Australian investors are too often holding or hoping as your ability to take advantage of a decline is limited – as there are only three inverse ETFs available on the ASX."

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