3 Ways You Can Make Money When The Stock Market Has Become Overvalued

It can be very frustrating when you have money sitting on the sidelines but feel

that the stock market is overvalued, and therefore unlikely to move any higher in the future. However all is not lost because there are still three ways in which you can generate some decent returns.

The first and most obvious method is to go short of the market. You can either open a short position on the actual index itself, whether it's the FTSE 100 or the Dow Jones index, for instance, or you can look for shorting opportunities amongst individual stocks.

I prefer the latter approach because by targeting weaker companies that maybe have high debts, flat or falling profit forecasts, or a P/E ratio that is far too high, you can give yourself a greater chance of making some decent returns. This is because even if the wider market doesn't turn, in the long run the share price of the individual company in question should come back down to reflect it's true market value.

The second way you can make money at a time when the wider market is seemingly overvalued is to forget about trading some of the large cap stocks that make up the major stock market indices, but concentrate instead on trading some of the smaller companies. You should find that there are lots of bargains to be had.

These companies often move independently of the wider market and are mainly driven by company-specific news. So by doing some data mining you should find at least one or two excellent companies with good growth prospects to invest in.

Finally if you don't want to look at some of these smaller companies, you can look for some decent income opportunities. So you could look to invest your money into some high-yielding bonds or savings accounts, for instance, or you could look at some large-cap stocks that have generous dividend yields, ie 5-10% (or more in some cases). These stocks are often referred to as defensive stocks and are great for providing you with a reliable long-term income, although the share price can still fall of course, particularly when the market is potentially overvalued.

So don't despair if you have lots of cash to invest but are worried about the stock market being too high, because you can still generate some decent profits if you're clever. The great thing about being an individual trader, rather than a fund manager, is that you have complete freedom as regards where you can invest your money, so make the most of this opportunity.

by: James Woolley

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