By Arthur Vidro
By Arthur Vidro
This year the stock market has been unusually volatile. But such ups and downs are normal. Far better to ignore the ups and downs of the moment.
Like everyone else, I check the quarterly statement for my retirement fund, but unlike many others I don’t bat an eye about it. If you don’t need the money right away, you should forget about that money. If you do need the money right away, then perhaps it shouldn’t be invested in stocks in the first place.
Seeing a large gain on your statement might make you feel wealthier and more prone to going on a spending spree. Resist the urge. Likewise, a large loss could make you feel you are financially ruined and need to take drastic actions. Chances are, you are not ruined and all you need to do is wait for your holdings to regain their value.
Many people hear the phrase “buy low, sell high,” and think that’s all there is to playing the stock market. But emotions come into play.
If a stock is doing great, greed kicks in and folks, expecting the stock to do even greater, purchase more. If a stock is plummeting, fear kicks in and they sell pronto to prevent even larger losses.
The best time to invest is when prices are low. However, that’s when most folks are too fearful to invest.
People here the phrase “the stock market” and think there’s only one such market. Not so. There are a handful in this country, and many industrialized nations have their own as well. “The stock market” usually refers to the Dow Jones Industrial Average, a composite of 30 stocks that is looked at to reflect our nation’s economy as a whole.
Stocks do not all go up in tandem, nor decline in tandem. Even in the best of times, you can find stocks that lose a great deal of value. Even in the worst of times, you can find stocks that gain a great deal of value.
One reason stock prices go up and down is simple supply and demand – there are more people trying to buy than sell Stock X (price goes up), or more people trying to sell than buy Stock X (price goes down).
Once computers hit the stock scene, ordinary folks became able to buy and sell stocks from a keyboard at home, watching the latest prices, trying to profit from the smallest of fluctuations, no matter how momentary.
As long as stocks are moving, there is potential profit.
Even if stocks are falling.
Most folks don’t understand a maneuver called “selling short.” This means, for instance, if in January your crystal ball told you the cruise industry would be incapacitated for most of the year, you might spend, say, $10,000 to sell short the Carnival cruise lines.
At the risk of over-simplifying the process, selling short means: some other entity more or less “lends” the Carnival stock to you, and you sell it at as high a price as possible. Later – sometimes minutes later, sometimes months later – you purchase the same number of shares of Carnival stock that you had sold earlier, and return the purchased stock to the entity that had originally loaned it to you, thus “closing” the position. (The original loan involved collateral.)
The entity that had loaned the stock gets a commission.
If the stock went down in value between the sell time and the buy time, that’s your profit.
If the stock went up in value between the sell time and the buy time, that’s your loss.
Carnival Corp. lost 73% of its value between January and mid-summer. So if you sold short, say, $10,000 worth of Carnival stock in January, you would pay $2,700 to close the position over the summer, leaving you with $7,300 (or 73%) profit. Other profitable short transactions if you had acted in January and closed out this summer: Royal Caribbean dropped 60%; Norwegian Cruise Line dropped 77%; American Airlines dropped 57%; United Airlines dropped 59%; Simon Property (which has an empire of malls) dropped 58%.
When you sell short, the best you can do is double your money. If you had put $10,000 on J.C. Penney short, the stock price would likely have gone down to pennies a share, and you would net nearly $10,000 from your trade.
On the other hand, there is no limit to how much you might lose. If your $10,000 short holding zooms up tenfold, then you will have to pay $100,000 to close out the deal, meaning a $90,000 loss for you.
So selling short isn’t for everyone.
But even in the worst of times, some stocks do great.
In this pandemic-stricken year, Amazon has gained 63% (all those extra deliveries and sales); Advanced Micro Devices (which makes semiconductors) is up 80%; and good old virus-fighting Clorox is up 45%.
Those are huge gains, especially in a down market.
If you have consumerism questions, send them to Arthur Vidro in the care of this newspaper, which publishes his column every weekend.
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