Last Updated: 07/05/2020

Choosabroker analysts review why a stock market crash seems increasingly likely and the top trading products which can be used to bet on it.

Macroeconomic conditions have certainly been appearing increasingly fragile over recent years. Some of the biggest economies in the world have been on the brink of recession in 2019 while several large-scale banks are coming dangerously close to insolvency. Government debt levels have approached record highs while over $16 trillion in negative-yielding debt floats around the economy.

Despite some doomsday forecasts, stock market indices formed record highs as recently as mid-January. Investors holding assets have been observing their wealth explode to the upside while those without assets are observing greater wealth inequality as inflationary pressures erode their purchasing power.

However, increasing numbers of analysts are agreeing that macroeconomic conditions are looking increasingly frothy. The recent Coronavirus outbreak shook markets with the prices on major stock market indices suffering sharp declines.

We can’t predict whether the Coronavirus development will be the catalyst for an impending bear market. But with prices looking increasingly prone to downside movements, analysts at Choosabroker present the tools that traders can use to capitalize on a stock market crash.

How to Capitalize on a Stock Market Crash?

There are several methods which traders can use to speculate on a stock market crash. For retail traders, online forex brokerages offer an attractive option to speculate on stock market movements.

Online brokerages typically allow financial traders to access a variety of markets through CFD products. CFD products allow traders to speculate on both long and short positions while also being able to apply leverage.

Such products will allow traders to take short positions or long positions in products which will benefit in the event of a stock market crash. But what products?

Safe Haven Plays for Stock Market Crashes

When panic spreads in global markets, safe haven currencies tend to outperform in the forex market. This was recently observed as the Japanese Yen, a widely considered safe haven, outperformed the USD when global markets realised that the Coronavirus outbreak in China was not being contained.

Safe haven currencies see enormous flows of capital from institutions and sovereigns when economic conditions become shaky. This capital inflow spurs outperformance.

The Japanese Yen (JPY) and Swiss Franc (CHF) are strongly considered to be safe haven currencies by the capital markets. Online forex brokerages will typically facilitate trading in these safe havens against the USD.

Forex pairs that are considered safe havens are not the only assets which tend to outperform in times of economic distress. Gold undoubtedly has the strongest reputation as a safe haven asset.

Investors globally have historically flooded to gold when they are fearful for global economic health. The importance of gold as an asset cannot be understated.

All sizes of investors – retail, institutions, and sovereigns – consider gold as a strong bet in times of economic turbulence. When economic conditions begin to look shaky, we start to see investors transition their funds from risk-on assets such as equities to risk-off assets such as gold. It’s worth checking our Best forex broker review as they often have a wealth of market data available.

Gold has been moving sharply to the upside since the mid-2019. Concerns regarding macroeconomic developments exacerbated around this time as countries started reporting weaker GDP figures and central banks pushed down interest rates in an attempt to spur the economy.

Bitcoin has recently been emerging as a potential safe-haven asset. Despite being considered a largely speculative and high-risk asset over its first decade of existence, Bitcoin has been showing higher levels of correlation with gold in times of economic stress.

Given its volatile nature, Bitcoin can be considered a more risky bet to take if speculating on a stock market crash. However, those who are looking for a higher-risk position can consider taking a long position in Bitcoin.

Most forex brokers will provide CFD products to trade gold. We have previously reviewed the best cryptocurrency brokers for traders who wish to trade Bitcoin.

Stock Market Speculation for an Impending Crash

There are also options within the stock market which will allow traders to capitalize on crashing prices. The most obvious way to capitalize on the stock market crashing is to take short positions in equity indices.

Each country has its major equity indices. The United States has the Dow Jones Industrial Average, the S&P 500 and several NASDAQ indices.

Indices are an instrument which tracks the performance of all shares that are listed in a specific index. Taking a short position in one of these indices is speculating on the entire market crashing.

Another option is to short an individual share. This is a stronger option if analysis leads you to believe that one company is particularly vulnerable to price declines.

This can even be an effective strategy when the overall stock market is increasing to new heights. Analysts who can pick out the weakest companies while the stock market remains bullish will see outsized returns.

Share performance Deutsche Bank

For instance, Deutsche Bank has been particularly weak given the toxic debt on its balance sheet and has been spiralling downward in price for several years. It is important to note that this strategy of picking stocks to short is extremely difficult under bullish conditions.

A safer option to take if you feel a stock market crash is impending is to transition capital into utility stocks. While these shares do not tend to outperform in times of economic distress, they do tend to hold their value better than riskier shares such as technology stocks.

Utility companies provide utensils that markets will demand even in times of economic trouble, making these shares a safer bet. However, this strategy is specifically suitable for investors holding a portfolio who need to allocate their capital in a way which protects against a stock market crash. It is not the best option for investors taking speculative positions with CFD instruments.

There’s More Than One Way

The age-old idiom of “There’s more than one way to skin a cat” certainly applies to the stock market. There are several methods by which investors can capitalize on stock market prices crashing. Safe haven plays, shorting indices, and shorting specific shares are all effective if executed correctly.

The strategy traders ultimately choose will depend on their risk preferences and the products available with the broker they choose to trade with. For more information on what brokers provide what trading instruments, check out the Choosabroker broker reviews.