What Investing Strategies Allow You to Bet Against a Stock?

Most stock investment strategies bank on shares increasing in value, but how do you bet against a stock? Also known as shorting, betting against a stock involves profiting from a stock’s decline in value. However, there are a few ways to do this. Short selling is one way and involves selling borrowed shares at the current price and aiming to repurchase them later for less. Trading put options allows investors to bet against a stock by buying contracts that gain value as the stock’s price falls. Other strategies, such as investing in inverse ETFs, contracts for difference (CFDs) and shorting futures indexes, allow investors to bet against individual stocks or broad market segments. All these strategies share the traits of complexity and above-average risk, which is why it is important to understand both the benefits and drawbacks before incorporating them into your financial plan.

Whether you want to invest in stock or bet against it, a financial advisor can help you develop a strategy for your portfolio.

Why Bet Against a Stock?

Betting against a stock can serve multiple purposes for investors, particularly those seeking to profit from market downturns or protect their portfolio from declining assets. Some investors take a bearish stance on a stock or sector when they believe the company’s fundamentals are weakening or the broader market is overvalued. This could lead to profit if the stock’s price falls.

Another reason to bet against a stock is to hedge existing positions. For example, an investor holding a large portfolio of stocks may use short positions to limit losses during periods of market volatility or economic uncertainty. Hedging in this way can help balance risk while protecting gains from other types of investments.

Some traders also engage in shorting as part of a broader speculative strategy. This aims to capitalize on short-term price movements driven by news, earnings reports or macroeconomic events. These strategies require careful timing and market analysis, as betting against a stock carries the risk of unlimited losses if the stock’s price rises unexpectedly.

How to Bet Against a Stock

When determining how to bet against a stock or the broader market, each strategy has its own approach, risks and potential rewards to consider.

1. Short Selling

Short selling is the most traditional way to bet against a stock. An investor borrows shares of a stock from a broker and sells them at the current market price. This is done with the intention of buying them back later at a lower price. If the stock price drops, the investor buys the shares back at the lower price, returns them to the broker and pockets the difference as profit.

However, short selling carries considerable risk. If the stock price rises instead of falling, the investor must still buy back the shares at a higher price, losing money in the process. Theoretically, there is no cap on how much money short sellers can lose, as there is no limit to how high a stock’s price can rise.

Additionally, brokers often require an investor to maintain a certain level of funds in a margin account to cover possible losses. If the stock rises too much, the investor may face a margin call and have to buy back the shares at a loss.

2. Put Options

Put options are another way to bet against a stock. A put option is a contract that gives the holder the right, but not the obligation, to sell a stock at a specified strike price by a certain expiration date. If the stock’s price falls below the strike price, the investor can buy the stock at the lower market price and sell it at the higher strike price, profiting from the difference.

Unlike the unlimited losses possible with short selling, trading put options limits losses to the premium paid for the option. Put options also allow for greater leverage, meaning an investor can control a larger amount of stock with a relatively small investment.

However, if the stock price does not drop by the expiration date, the option expires without value, and the investor loses the premium paid. This is why timing is key with options, as the stock must decline within the specified timeframe.

3. Inverse ETFs

Inverse ETFs offer a more straightforward way to bet against the stock market or a specific sector without directly shorting individual stocks. These funds are designed to move in the opposite direction of an index, sector or asset class. For example, if an inverse ETF tracks the S&P 500, it will rise when the S&P 500 falls.

Inverse ETFs can be attractive to investors who want to short a broad market or sector without the complexity of short selling or options trading. These funds are easy to trade, available through most brokerage accounts and do not require a margin account.

However, inverse ETFs are typically designed for short-term use and can lose value over time due to compounding effects, especially in volatile markets. This makes them less suitable for long-term bearish positions. Additionally, some inverse ETFs use leverage to amplify returns, potentially increasing both profits and losses.

4. Contracts for Difference (CFD)

Although banned in the United States, a contract for difference (CFD) is a derivative instrument that allows investors in other countries to speculate on the price movement of an asset without owning the underlying asset. When an investor opens a short CFD position on a stock, they are betting that the stock’s price will fall. If the price declines, the investor earns the difference between the opening price and the closing price of the contract.

CFDs are often used by traders seeking flexibility, as they allow for short positions without the need for borrowing shares or setting up a margin account for short selling. They also provide the benefit of leverage, allowing investors to control larger positions with a smaller initial investment. However, leverage works both ways – it can amplify gains but also increase losses.

Another risk with CFDs is that they are not available in all countries. Be careful to review trading fees and financing costs that can add up over time, especially in highly leveraged positions.

5. Shorting Futures Indexes

Shorting futures indexes is a method for betting against the broader market by using futures contracts. These contracts allow investors to speculate on the future price of a market index, such as the S&P 500 or the NASDAQ.

When an investor shorts a futures index, they are agreeing to sell the index at a specific price on a future date. If the index’s value decreases before the contract’s expiration, the investor profits by buying back the index at the lower price.

Shorting futures indexes is often used by professional traders and institutions as a way to hedge portfolio exposure or speculate on market downturns. The futures market offers high leverage, meaning that even small price movements can result in substantial profits or losses.

High leverage and potential market volatility make shorting futures indexes a high-risk strategy. Additionally, futures contracts have set expiration dates, so investors need to be mindful of the contract’s terms and timing to avoid being caught by sudden price movements.

Risks of Betting Against a Stock

An investor reviewing investment strategies.

Betting against a stock can be risky, so it is critical to understand the potential downsides before implementing any bearish strategy. Unlike buying a stock, where your maximum loss is limited to the amount you invest, short selling carries unlimited loss potential, since a stock’s price can theoretically rise indefinitely.

For example, if you short a stock at $50 and it rises to $100, you lose $50 per share. If it climbs to $200 or more, the losses continue to grow. This makes short selling particularly risky during sudden rallies, strong earnings reports or unexpected positive news that pushes the stock price higher.

Another danger is a short squeeze, where a heavily shorted stock rapidly rises in price, forcing short sellers to buy back shares at higher prices to cover their positions. This buying activity can accelerate the price increase even more, compounding losses.

To help manage these risks, consider using stop-loss orders, which automatically close your position if the stock rises to a predetermined price. You might also set position limits such as allocating only a small portion of your portfolio to bearish trades to protect your overall investments.

When Does It Make Sense to Bet Against a Stock?

Although risky, betting against a stock can make sense in certain situations.

A company’s fundamentals are deteriorating, such as declining revenues, mounting debt, or poor management.
A stock’s price has become overhyped or overvalued, often fueled by speculation rather than underlying performance.
An entire industry or sector is in decline, facing structural challenges like technological disruption or regulatory pressures.
You are hedging existing positions and using bearish trades to offset potential losses elsewhere in your portfolio.

Before making a bearish bet, it is wise to analyze both the company and the broader market using fundamental analysis (e.g., financial statements and competitive position) and technical analysis (e.g., price trends and trading volume) to strengthen your case. Combining these tools can help you identify higher-probability opportunities while minimizing unnecessary risk.

Bottom Line

Betting against a stock involves a range of strategies that allow investors to profit from a decline in the price of individual stocks or broader markets. Approaches such as short selling, put options and inverse ETFs offer different ways to capitalize on falling prices, each with its own varying degrees of risk and complexity. While short selling involves borrowing shares and repurchasing them at a lower price, options provide a more limited-risk method by purchasing contracts that benefit from price drops. Inverse ETFs and other tools like CFDs and futures allow broader market bets, offering diverse opportunities for investors looking to hedge or speculate.

Work with a financial advisor to create an investment strategy that makes sense based on your existing portfolio and risk tolerance.

Tips for Investment Planning

A financial advisor can help you analyze investments and manage your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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