What's the best way to make money from a market correction?
What's the best strategy? Buy low and sell high. Now. A lot of people try to do this. A few are successful, but for the most part, people who try to time the market end up worse. A far more successful strategy is to save over your entire lifetime, put the money into a very low-cost market fund, and just let the average performance take you to retirement. Put another way, if you think that there is an obvious, no-fail, double-your-money-due-to-a-correction strategy, you're wrong. Otherwise everyone would do it. And someone who tells you that there is such a strategy almost surely will be trying to separate you from a good amount of your money.  In the end, $80K isn't a life-altering, never-have-to-work-again amount of money. What I think you ought to do with it is: pay off any credit card debts you may have, pay a significant chunk of student loan or other personal loan debts you may have, make sure you have a decent emergency fund set aside, and then put the rest into diversified low-cost mutual funds. Think of it as a nice leg-up towards your retirement. The best way to make money during a market correction is to be a financial services company handling transactions for people who think they can beat the market, and charging a percentage commission on each transaction, while keeping your own money somewhere nice and safe, stable and low-fee. "As ChrisInEdmonton describes, shorting has an asymmetric risk/reward ratio. And put options have a time cost, if you think the market is overvalued and buy lots of puts, but they expire before the market finally corrects, you can lose your entire investment.  Betting on market timing of any kind is extremely difficult to do, some would argue it's impossible. ""The market can remain irrational longer than you can remain solvent"" is a favorite wall street trader saying. Instead of playing a game that's difficult to win, the better option is to play one you can win. That's to learn how to value individual investments well and accumulate cash until you can find investments that are under-valued to invest in. The best way to learn to value investments is to read Graham and Buffett. ""The Intelligent Investor"" is a good starting point, and you can read all of Buffett's investor letters for the last 30 years + for free on the Berkshire Hathaway web site. Finally the textbook on valuing stocks and other investments is ""Securities Analysis"" the 6th edition is only version to get, it was updated with Buffett and other leading value investors oversight. A basic overview of valuing investments is that every investment has an ""intrinsic value"" consisting of it's future cash flows, discounted for the time it takes to receive them. The skill is being able to estimate how likely those cash flows are to happen. a) Is it a good business? Does it have a moat, i.e. barriers that make it hard for competitors to duplicate it? b) Will management invest or distribute those cash flows wisely? Then your strategy is to not even worry about the market, spend your time looking at individual stocks and investments and wait until some come along that's well undervalued. That may be during a market correction, or it may be tomorrow. And it's not just good enough to intelligently value your investments, you also have to have psychological fortitude to not panic and to think for yourself. Buffett describes it best. Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him. Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. Lastly learning to value investments isn't just useful in the stock market, they are applicable to investing in any investment such as bonds, real estate, and even buying your home or running a business." There are several ways to protect against (or even profit from) a market correction. Hedge funds do this by hedging, that is, buying a stock that they think is strong and selling short a paired stock that is weak. If you hold, say, a strong retail company in your portfolio, you might sell short an equal weight of a weak retail company.  These are like buying insurance on your portfolio. If you own 300 shares of XYZ, currently trading at $68, you buy puts at a level at a strike price that lets you sleep at night. For example, you might buy 3 XYZ 6-month puts with a strike price of $60. A disadvantage is that the puts are wasting assets, that is, their time premium (which you paid for at the outset) becomes zero at expiration. (This is why it is like insurance. You wouldn't complain that your insurance premium was lost when you purchase insurance on your house and the house doesn't burn down, would you? Of course not. The purpose of the insurance is to protect your investment.) Note that as these puts are married, they only protect your portfolio. Instead of profiting from a correction, you would merely protect your portfolio during a correction. (No small feat!) If your portfolio is similar to the market, you can buy S&P index puts. If your market reflects a lot of technology, you can buy technology sector puts.  Say you have a portfolio of $80K that reflects the market. You could buy out-of-the-market puts (again reflecting your tolerance for loss). Any losses in your portfolio after the puts go in-the-money would be (more or less) offset by gains in the puts.  An advantage is that the bid/ask spread is smaller for the S&P. You would pay less for the protection. Also, the S&P puts are cash settled (meaning you get money put in your account on the business day after expiration day). A disadvantage is that the puts do not linearly go up as the market drops. (Delta hedging is a big deal in and of itself.) Another disadvantage is that they are wasting assets (see the Married puts section, previous). While the S&P puts can be used to maintain your market portfolio in the midst of a correction, you could purchase more puts than needed. If you had correctly timed the market, then your portfolio with puts would increase. (Your mileage may vary; some have predicted an imminent market crash way too often.) Collars involve selling out-of-the-money calls and using the premiums to buy out-of-the-money puts. There are many varieties of collars, but the most straightforward is to sell 1 call and buy 1 put for every 100 shares. (This can also be done for index puts and calls.) This has the effect of simultaneously: You get your insurance for almost free. But again, it is protecting your portfolio.  As the name implies, you make money when the market goes bearish.  Bear put spreads involve buying puts at a close strike price and selling an equal number of puts at a lower strike price than the first. You have a defined maximum loss (the premium you paid for the higher put minus the premium you received for the lower put). You have a defined maximum gain (the difference between strikes minus the defined maximum loss).  Buy S&P 500 index puts. If you buy deep out-of-the-money puts, it won't cost much, but you have little probability of it paying off. But if they go in-the-money, there could be a sizable payoff. This is similar to putting one chip on red 18 on the roulette wheel. But rather than paying off 35:1, it is a variable payoff. If you're $1 in the money, you just get $100. If you're $12 in the money, you have a $1200 payoff.  If you buy at-the-money puts, it will cost a lot, and your probability will be about 1 in 2 that you will pay off. In our roulette analogy, this is like putting 30 chips on the Even bet of the roulette wheel. The variable payoff is as in the previous paragraph. But you're more likely to get a payoff. And you will lose it all of the roulette ball lands on an Odd number, 0, or 00. (That is, the underlying of your put goes up or stays the same.) If your research shows you what good stocks to buy, it may also tell you which stocks are ripe for a fall. You could short-sell these stocks or buy puts on them.  Similar to short-selling stocks or buying puts, you could sell short overpriced sectors or buy puts on them. There are ETFs that will allow you benefit from falling prices without needing to have a margin agreement or options agreement in place.  Sorry to have a lengthy answer. Many other answers emphasize that one shouldn't try to time the market. But that is not the OP's question. Provided here are both: If you are sure you are right, you should sell stock short. Then, after the market drop occurs, close out your position and buy stock, selling it once the stock has risen to the level you expect. Be warned, though. Short selling has a lot of risk. If you are wrong, you could quite easily lose all $80,000 or even substantially more. Consider, for example, this story of a person who had $37,000 and ended up losing all of that and still owing over $100,000. If you mistime your investment, you could quite easily lose your entire investment and end up hundreds of thousands of dollars in debt. There are a few ways to make money from a market correction: "Do you want to do it pre or post correction? If you're bearish on the market the obvious thing to do is short an index. I would say this is kind of dumb. The main problem is that it may take months or years for the market to crash, and by then it will have gone up so much that even the crash doesn't bring you profit, and you're paying borrowing fees meanwhile as well. You need to watch the portfolio also, when you short sell you'll get a bunch of cash, which you most likely will want to invest, but once you invest it, the market can spike and pummel your short position, resulting in negative remaining cash (since you already spent it). At that point you get a margin call from your broker. If you check your account regularly, not a big deal, but bad things can happen if you treat it as a fire and forget strategy. These days they have inverse funds so you don't have to borrow anything. The fund manager borrows for you. I'd say those are much better. The less cumbersome choice is to simply sell call options on the index or buy puts. These are even cash options, so when you exercise you get/lose money, not shares. You can even arrange them so that your potential loss is capped. (but honestly, same goes for shorts - it's called a stop loss) You could also wait for the correction and buy the dip. Less worrying about shorts and such, but of course the issue is timing the crash. Usually the crashes are very quick, and there are several ""pre-crashes"" that look like it bottomed out but then it crashes more. So actually very difficult thing to tell. You have to know either exactly when the correction will be, or exactly what the price floor is (and set a limit buy). Hope your crystal ball works! Yet another choice is finding asset classes uncorrelated or even anticorrelated with the broader market. For instance some emerging markets (developing countries), some sectors, individual stocks that are not inflated, bonds, gold and so on can have these characteristics where if S&P goes down they go up. Buying those may be a safer approach since at least you are still holding a fundamentally valuable thing even if your thesis flops, meanwhile shorts and puts and the like are purely speculative." For a non-technical investor (meaning someone who doesn't try to do all the various technical analysis things that theoretically point to specific investments or trends), having a diverse portfolio and rebalancing it periodically will typically be the best solution. For example, I might have a long-term-growth portfolio that is 40% broad stock market fund, 40% (large) industry specific market funds, and 20% bond funds.  If the market as a whole tanks, then I might end up in a situation where my funds are invested 30% market 35% industry 35% bonds.  Okay, sell those bonds (which are presumably high) and put that into the market (which is presumably low).  Now back to 40/40/20.   Then when the market goes up we may end up at 50/40/10, say, in which case we sell some of the broad market fund and buy some bond funds, back to 40/40/20.  Ultimately ending up always selling high (whatever is currently overperforming the other two) and buying low (whatever is underperforming).   Having the industry specific fund(s) means I can balance a bit between different sectors - maybe the healthcare industry takes a beating for a while, so that goes low, and I can sell some of my tech industry fund and buy that.   None of this depends on timing anything; you can rebalance maybe twice a year, not worrying about where the market is at that exact time, and definitely not targeting a correction specifically.  You just analyze your situation and adjust to make everything back in line with what you want. This isn't guaranteed to succeed (any more than any other strategy is), of course, and has some risk, particularly if you rebalance in the middle of a major correction (so you end up buying something that goes down more).  But for long-term investments, it should be fairly sound. Depends on how long you're willing to invest for. Broadly speaking, the best (by which I mean, more reliably repeatable) way to make money from market corrections is to accept them as a fact of life, and not sell in a panic when they happen, such that the money you already invested can ride back up again. Put another way, just invest your money in one or two broad, low cost index funds with dividends reinvested (maybe spreading your investment over the course of six months or so) and then let time do its work. Have you worked out how much you've missed out on by holding your money as cash all this time (I presume you've been saving up a while) instead of investing it as you went? I suspect that by waiting for your correction, you've already missed out on more than you're going to make from that correction. A lot of people here talk about shorting stocks, buying options, and messing around with leveraged ETFs. While these are excellent tools, that offer novel opportunities for the sophisticated investor, Don't mess around with these until you have been in the game for a few years. Even if you can make money consistently right out of the gate, don't do it. Why? Making money isn't your challenge, NOT LOSING money is your challenge. It's hard to measure the scope of the risk you are assuming with these strategies, much less manage it when things head south. So even if you've gotten lucky enough to have figured  out how to make money, you surely haven't learned out how to hold on to it. I am certain that every beginner still hasn't figured out how to comprehend risk and manage losing positions. It's one of those things you only figure out after dealing with it. Stocks (with little to no margin) are a great place to learn how to lose because your risk of losing everything is drastically lower than with the aforementioned tools of the sophisticated investor. Despite what others may say you can make out really well just trading stocks.  That being said, one of my favorite beginner strategies is buying stocks that dip for reasons that don't fundamentally affect the company's ability to make money in the mid term (2 quarters).  Wallstreet loves these plays because it shakes out amateur investors (release bad news, push the stock down shorting it or selling your position, amateurs sell, which you buy at a discount to the 'fair price'.) A good example is Netflix back in 2007. There was a lawsuit because netflix was throttling movie deliveries to high traffic consumers. The stock dropped a good chunk overnight.  A more recent example is petrobras after their huge bond sale and subsequent corruption scandal. A lot of people questioned Petrobras' long-term ability to maintain sufficient liquidity to pay back the loans, but the cashflow and long term projections are more than solid. A year later the stock was pushed further down because a lot of amateur Brazilians invest in Petrobras and they sold while the stock was artificially depressed due to a string of corruption scandals and poor, though temporary, economic conditions. One of my favorite plays back in 2008-2011 was First Solar on the run-up to earnings calls. Analysts would always come out of these meetings downgrading the stock and the forums were full of pikers and pumpers claiming heavy put positions. The stock would go down considerably, but would always pop around earnings. I've made huge returns on this move. Those were the good ole days. Start off just googling financial news and blogs and look for lawsuits and/or scandals. Manufacturing defects or recalls. Starting looking for companies that react predictably to certain events. Plot those events on your chart. If you don't know how to back-test events, learn it.  Google Finance had a tool for that back in the day that was rudimentary but helpful for those starting out. Eventually though, moreso than learning any particular strategy, you should learn these three skills: 1) Tooling: to gather, manipulate, and visualize data on your own.  These days automated trading also seems to be ever more important, even for the small fish. 2) Analytical Thinking learn to spot patterns of the three types:  event based (lawsuits, arbitrage, earnings etc), technical (emas, price action, sup/res), or business-oriented (accounting, strategy, marketing). Don't just listen to what someone else says you should do at any particular moment, critical thinking is essential. 3) Emotions and Attitude: learn how to comprehend risk and manage your trigger finger. Your emotions are like a blade that you must sharpen every day if you want to stay in the game. Disclaimer: I stopped using this strategy in 2011, and moved to a pure technical trading regime. I've been out totally out of the game since 2015.
"What is being described in Longson's answer, though helpful, is perhaps more similar to a financial spread bet. Exactly like a bookmaker, the provider of a spread bet takes the other side of the bet, and is counter party to your ""trade"". A CFD is also a bet between two parties. Now, if the CFD provider uses a market maker model, then this is exactly the same as with a spread bet and the provider is the counter party. However, if the provider uses a direct market access model then the counter party to your contract is another CFD trader, and the provider is just acting as an intermediary to bring you together (basically doing the job of both a brokerage and an exchange). A CFD entered into through a direct market access provider is in many ways similar to a Futures contract. Critically though, the contract is traded 'over-the-counter' and not on any centralized and regulated exchange. This is the reason that CFDs are not permitted in the US - the providers are not authorized as exchanges. Whichever model your CFD provider uses, it is best to think of the contract as a 'bet' on the future price movements of the underlying stock or commodity, in much the same way as with any other derivative instrument such as futures, forwards, swaps, or options. Finally, note that because you don't actually own the underlying stock (just as Longson has highlighted) you won't be entitled to any of the additional benefits that can come with ownership of a stock, such as dividend payments or the right to attend shareholder meetings. RESPONSE TO QUESTION So if I understand correctly, the money gained through a direct market access model comes from other investors in the same CFD who happened to have invested in the ""wrong"" direction the asset was presumed to take. What happens then, if no one is betting in the opposite direction of my investment. Your understanding is correct. If literally nobody is betting in the opposite direction to you, then you will not be able to trade. This is true for any derivative market; if suddenly every single buyer were to remove their bids from the S&P futures, then no seller would be able to sell. This is a very extreme scenario, as the S&P futures market is incredibly liquid (loads of buyers and sellers at all times).  However, if something like this does happen (the flash crash of 2010, for example), then the centralized futures exchanges such as the CME have safeguards in place - the market become locked-limit so that it can only fall so far, there may be no buyers below the lock limit price, but the market cannot fall through it. CFD providers are not obliged to provide such safeguards, which is why regulators in the US don't permit them to operate. It may be the case that if you're trying to buy a CFD for a thinly traded and ill-liquid stock there will be no seller available. One possibility is that the provider will offer a 'hybrid' model, and in the absence of an independent counter party they will take the opposite side of your bet, and then offset their risk by taking an opposing position in the underlying stock." There are a number of scholarly articles on the subject including a number at the end of the Vanguard article you reference.  However, unfortunately like much of financial research you can't look at the articles without paying quite a bit. It is not easy to make a generic comparison between lump-sum and dollar cost averaging because there are many ways to do dollar cost averaging.  How long do you average over?  Do you evenly average or exponentially put the money to work?  The easiest way to think about this problem though is does the extra compounding from investing more of the money immediately outweigh the chance that you may have invested all the money when the market is overvalued.  Since the market is usually near the correct value investing in lump sum will usually win out as the Vanguard article suggests. As a side note, while using DCA on a large one time sum of money is generally not optimal, if you have a consistent salary DCA by frequently investing a portion of your salary has been frequently shown to be a very good idea of long periods over saving up a bunch of money and investing it all at once.  In this case you get the compounding advantage of investing early and you avoid investing a large chunk of money when the market is overvalued. "Dividends are one way to discriminate between companies to invest in. In the best of all worlds, your investment criteria is simple: ""invest in whatever makes me the most money on the timeline I want to have it.""  If you just follow that one golden rule, your future financial needs will be taken care of! Oh... you're not 100% proof positive certain which investment is best for you?  Good.  You're mortal.  None of us magically know the best investment for us.  We wing it, based on what information we can glean.  For instance, we know that bonds tend to be ""safer"" than stocks, but with a lower return, so if something calls itself a bond, we treat it differently than we treat a stock. So what sorts of information do we have?  Well, think of the stock market linguistically.  A dividend is one way for a company to communicate with their stockholders in the best way possible: their pocketbooks.  There's some generally agreed upon behaviors dividends have (such as they don't go down without some good reason for it, like a global recession or a plan to acquire another company that is well-accepted by the stockholders).  If a company starts to talk in this language, people expect them to behave a certain way.  If they don't, the stock gets blacklisted fast.  A dividend itself isn't a big deal, but a dividend which isn't shunned by a lot of smart investors... that can be a big deal. A dividend is a ""promise"" (which can be broken, of course) to cash out some of the company's profits to its shareholders.  Its probably one of the older tools out there (""you give investors a share of the profits"" is pretty tried and true).  It worked for many types of companies.  If you see a dividend, especially one which has been reliable for many years, you can presume something about the type of company they are. Other companies find dividend is a poor tool to accomplish their goals.  That doesn't mean they're better or worse, simply different.  They're approaching the problem differently.  Is that kind of different the kind you want in your books?  Maybe.  Companies which aren't choosing to commit a portion of their profits to shareholders are typically playing a more aggressive game.  Are you comfortable that you can keep up with how they're using your money and make sure its in your interests?  It can be harder in these companies where you simply hold a piece of paper and never get anything from them again." "&gt; Thank you for the wealth of information!  Sure, I hope my opinions are food for thought.  &gt; 1) Does that basically translate to ""less tax on poor/wealthy...to promote entrepreneurship?  No, your typical entrepreneur is a smart, disgruntled employee who thinks they have a better way to do a job.  If you want more entrepreneurs, you should do things to help them succeed in a new company and minimize the risk.  Some ways to do this:  * Create a government agency that offers programs that help new companies.  Guidance and funding are obvious candidates.  Advertising for small local business would help too.  One of the most important would be getting complementing talent together because a start-up needs the talents of at least four different people to have a good chance of succeeding.  * Establish guaranteed health care.  A 40-something with a wife and kids may have a great idea but can't risk to leave his family with no health insurance for the two years it would take to get his idea off the ground.  * Better enforce anti-trust law.  I believe small companies are stifled by big companies because the latter control too much of the market.  If you want competitive markets you need to either break-up or handcuff and monitor the big players.  * Create a better safety net.  It is a lot easier to go on your own if you know at least you won't starve.  &gt; 2) Rich using money to grow their own wealth. But wouldn't that mean as a byproduct, jobs will be made?  In theory, yes, but I believe in practice the opposite happens.  Big companies can make significantly more money hoarding their market share rather than branching into new markets.  Here's a true story of my last company with names changed:  Company A makes widgets.  Company B makes bookkeeping software for tracking widgets and is very successful, controlling a majority of the market.  Company A buys Company B at an inflated price.  The government allows the sale on the condition that Company A does not use Company B's information on the widget market to gain an unfair advantage.  Company A agrees and the buyout takes place.  Company A then approaches all of Company B's customers and says, ""Let us look at the data on your bookkeeping software and we will give you a 5% discount.""  Most customers agree so Company A now has all the data controlled by Company B but this is not illegal because they got it from Company B's customers, not company B.  Company A proceeds to undercut the market because it now knows exactly how much their competitors widgets sell for.  Company A now controls a majority of the widget market and their market share continues to grow rapidly.  By the way [here is that Bloomberg article I described earlier about repatriation being about buyouts](https://www.bloomberg.com/gadfly/articles/2017-05-08/theory-of-tax-repatriation-is-better-than-the-reality).  &gt;&gt;  Take home money is used for investment. It isn't.  &gt; 3) I don't think I understand this one at all. Will you rephrase it for me?  The argument is that we need to tax corporations less so they can invest more.  Here's the problem -- investments are not taxed.  A corporation's tax is a percentage of their gross income minus their expenses.  Investment is an expense.  Therefore the more they invest, the lower their tax bill.  If you want companies to invest more, raise their tax rate.  &gt; 4) I did hear from my professor and the educational videos he had shown us that the capital tax is one of the highest among the other OECD nations.  I need to walk back what I said earlier.  The US corporate tax rate is one of the highest.  Does that mean US corporations pay the most tax?  Well, [it's complicated](http://www.npr.org/2017/08/07/541797699/fact-check-does-the-u-s-have-the-highest-corporate-tax-rate-in-the-world).  &gt; ...why can't we just close loop-holes instead of choosing to slash capital tax?  Note that those go in opposite directions.  Closing loopholes would make companies pay more.  Slashing capital tax would have them pay less.  Perhaps doing both would be revenue neutral.  I would be in support of that because I suspect loopholes benefit big companies a lot more than small ones because they have the resources to find and exploit those loopholes.  That said, people in power have been talking for 20 years about ""closing the loopholes"".  They never do.  [CGP Gray has an excellent video explaining why these loopholes are not going anywhere anytime soon](https://www.youtube.com/watch?v=rStL7niR7gs).  &gt; 5) I think it's in each company's best interest to further their own agenda, and that agenda usually means bad for the majority.  Yes, that's a much better way of saying what I meant.  &gt; Thank you in advance for your time.  Sure, thanks for thinking, asking questions, and making up your own mind." "The process of borrowing shares and selling them is called shorting a stock, or ""going short.""  When you use money to buy shares, it is called ""going long."" In general, your strategy of going long and short in the same stock in the same amounts does not gain you anything.  Let's look at your two scenarios to see why. When you start, LOOT is trading at $20 per share.  You purchased 100 shares for $2000, and you borrowed and sold 100 shares for $2000.  You are both long and short in the stock for $2000.  At this point, you have invested $2000, and you got your $2000 back from the short proceeds.  You own and owe 100 shares. Under scenario A, the price goes up to $30 per share.  Your long shares have gone up in value by $1000.  However, you have lost $1000 on your short shares.  Your short is called, and you return your 100 shares, and have to pay interest.  Under this scenario, after it is all done, you have lost whatever the interest charges are. Under scenario B, the prices goes down to $10 per share.  Your long shares have lost $1000 in value.  However, your short has gained $1000 in value, because you can buy the 100 shares for only $1000 and return them, and you are left with the $1000 out of the $2000 you got when you first sold the shorted shares.  However, because your long shares have lost $1000, you still haven't gained anything.  Here again, you have lost whatever the interest charges are. As explained in the Traders Exclusive article that @RonJohn posted in the comments, there are investors that go long and short on the same stock at the same time.  However, this might be done if the investor believes that the stock will go down in a short-term time frame, but up in the long-term time frame.  The investor might buy and hold for the long term, but go short for a brief time while holding the long position. However, that is not what you are suggesting.  Your proposal makes no prediction on what the stock might do in different periods of time.  You are only attempting to hedge your bets.  And it doesn't work.  A long position and a short position are opposites to each other, and no matter which way the stock moves, you'll lose the same amount with one position that you have gained in the other position.  And you'll be out the interest charges from the borrowed shares every time. With your comment, you have stated that your scenario is that you believe that the stock will go up long term, but you also believe that the stock is at a short-term peak and will drop in the near future.  This, however, doesn't really change things much.  Let's look again at your possible scenarios. You believe that the stock is a long-term buy, but for some reason you are guessing that the stock will drop in the short-term.  Under scenario A, you were incorrect about your short-term guess.  And, although you might have been correct about the long-term prospects, you have missed this gain.  You are out the interest charges, and if you still think the stock is headed up over the long term, you'll need to buy back in at a higher price. Under scenario B, it turns out that you were correct about the short-term drop.  You pocket some cash, but there is no guarantee that the stock will rise anytime soon.  Your investment has lost value, and the gain that you made with your short is still tied up in stocks that are currently down. Your strategy does prevent the possibility of the unlimited loss inherent in the short.  However, it also prevents the possibility of the unlimited gain inherent in the long position.    And this is a shame, since you fundamentally believe that the stock is undervalued and is headed up.  You are sabotaging your long-term gains for a chance at a small short-term gain." "Being ""long"" - expecting the price to go up to make a profit - is a two step process:  1) buy 2) sell Being ""short"" - expecting the price to go down to make a profit - is a 5 step process:  1) borrow someone else's asset 2) sell their asset on the open market to somebody else a third party 3) pocket the proceeds of the sell for your own account 4) buy an identical asset for a cheaper price 5) return this identical asset to the person that let you borrow their asset if this is successful you keep the difference between 3) and 4)" When credit locks up, junk bond prices fall rapidly, and you see more defaults. The opportunity to make money with junk is to buy a diversified collection of them when the market declines. Look at the charts from some of the mutual funds or ETFs like PIMCO High Yield Instl (PHIYX), or Northeast Investors (NTHEX). Very volatile stuff. Keep in mind that junk bonds are not representative of the economy as a whole -- they cluster in certain industries. Retail and financials are big industry segments for junk.  Also keep in mind that the market for these things is not as liquid as the stock market. If your investment choice is really a sector investment, you might be better served by investing in sector funds with stocks that trade every day versus bonds whose market price may be difficult to determine. "This is basically martingale, which there is a lot of research on. Basically in bets that have positive expected value such as inflation hedged assets this works better over the long term, than bets that have negative expected value such as table games at casinos. But remember, whatever your analysis is: The market can stay irrational longer than you can stay solvent. Things that can disrupt your solvency are things such as options expiration, limitations of a company's ability to stay afloat, limitations in a company's ability to stay listed on an exchange, limitations on your borrowings and interest payments, a finite amount of capital you can ever acquire (which means there is a limited amount of times you can double down). Best to get out of the losers and free up capital for the winners. If your ""trade"" turned into an ""investment"", ditch it. Don't get married to positions."