There are several "tricks" that experienced investors use to make a profit.
Like the rest of the stock market, these tricks are very risky, and you
should know what you are doing if you use these tricks. The tricks include
selling short, buying on margin, and buying warrants.
The first risky trick is short selling. Basically, short selling is
selling a stock before you actually buy it. To sell short, you first borrow
stocks from a broker. Then, you sell them immediately on the market. You keep
the money that you earned from selling the stocks, and wait, hoping that the
price for the stock will drop. If the price for the stock does drop, then
you can buy back the stock, and give them back to your broker. You will then
have made a profit, since you sold them for more than you bought them for. For
example, if you borrow 100 stocks at 4 dollars per stock, and sell them in the
market, you have 400 dollars. If you wait a while, and the price of the stock
decreases to 2 dollars per stock, you can buy 100 stocks for 200 dollars. You
then return the 100 stocks to the broker, pay a little bit of interest, and keep
the other 200 dollars. Unfortunately, selling short does not always end as well as that. Consider
if you borrow 100 stocks at 4 dollars a stock again. You then sell them and
get 400 dollars. You wait a few weeks, but the price of the stock continues
to increase. Before you know it, the price of the stock is 6 dollars. You
have to give the broker his stocks, and you have to pay him interest. This means
that you have to pay 600 dollars to get the stocks back, and right there, you
just lost 200 dollars.
Buying on margin is another trick which is basically buying stocks on borrowed
money. You must first set up a margin account, which has a minimum balance
of 2000 dollars. Once you have a margin account, you can borrow up to 50 percent
of the cost of buying the stocks you want. By borrowing 50 percent of the cost,
you are controlling something twice as valuable as what you paid for. This will
enable you to gain more profits with less money. For example, if you put in 500
dollars, and the broker lends you 500 dollars, then you have 1000 dollars to work with.
You then buy 100 stocks at 10 dollars a stock. If the price for the stock increases
to 15 dollars, and you sell at that price, then you have 1500 dollars. You then
pay back the broker the 500 dollars plus interest, and you have made roughly 1000 dollars,
doubling your initial investment of 500 dollars,. If you had only invested 500 dollars
of your own money, you would have only gotten 50 stocks. Then, after selling them for
15 dollars, you would have made only 750 dollars, which is only 250 dollars more than
your initial investment. The risky part about this is that your losses are also
magnified. Had you bought 100 stocks on margin at 10 dollars, and the price had
dropped to 5 dollars, you would have lost all 500 of your dollars, since you
have to pay the broker back his 500 dollars. If you had invested only your 500
dollars and bought 50 stocks at 10 dollars, and the price dropped to 5 dollars,
then you would only have lost 250 dollars.
Buying warrants is a less risky trick. A warrant is sold by
a company that is planning on issuing stocks soon. The warrant gives you the
right to buy stocks at a certain price. For example, if you buy a warrant to buy
a stock at 5 dollars for 1 dollar, and the stock ends up being issued at 10 dollars
a share, then you can sell the shares for a profit of 4 dollars per share, since
you paid only 6 dollars total, and sold them at 10 dollars.