How to Profit When Markets Are Down

The Dow Jones fell 168 points this morning (Wednesday) after losing 85 points yesterday. This prompted a slew of panic-inducing headlines around the web.

People get nervous when markets plunge, but stock market downturns are just a fact of investing. They're very rarely anything more than a short-term adjustment.

Rather than dwell on short-term losses, investors should be on the hunt for opportunities. Here's exactly how to profit when markets are down.

No. 1. Buy Stocks on Sale: This is the most obvious way to take advantage of a market downturn. Maintain a wish list of stocks you'd like to buy if they were just a little cheaper. A market downturn is the perfect chance to use such a list.

No. 2. Sell Stocks Short: In short selling, you borrow shares from your broker and sell them at the current market price. The idea is to profit by buying the shares back at a lower price once the stock drops. If all goes well, you return the shares to the broker and keep the difference as profit (minus a small margin fee). Learn more on how to short stocks here.

No. 3. Profit When an Index Falls: A reverse index fund rises when the market falls and falls when the market rises. It's essentially a hedge against any downturn. Options include the Rydex Inverse S&P 500 Strategy Fund (MUTF: RYURX), which tracks the S&P 500 and rises 1% for every 1% the index falls, and the ProShares Short Dow30 ETF (NYSE Arca: DOG), which tracks the Dow Jones.

Finally, prepare your portfolio ahead of any market downturns by using trailing stops. This tool limits losses, be they from a single lousy earnings report from a company or a stock market crash.

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