As you where shown in the part 1 of the renting stocks strategy, it is quite easy to rent our stocks out and receive a rental premium on the stocks that we are holding. You have been shown that you can purchase your stocks, determine a rental price and timeframe for renting out these stocks and get money deposited into your account within 24 hours…but what happens with our “ABC” stocks next?
Technically – Only 3 Things Can Happen…
- Our Stock price can go up
- Our Stock price can stay the same
- Our Stock price can go down
Lets look at the above Stock movements in a little more detail…
1. Our Stock Price goes up…
We have purchased our stocks, we have received our rental premium…now at the end of the rental term we have selected, let’s assume that our stock price has gone up to $11.20 (which is 20c above the price that we have rented our stocks out for)
When the stock price exceeds the price we have rented the stocks out for ($11 in this scenario), our stocks will automatically be sold for us at the rental price of $11, which we are more than happy with as it means we make more money from the trade.
“ABC” Stocks Trade Summary:
Bought 1000 stocks @ $10 each (cost $10,000)
Rented 1000 stocks @ $11 each (received $1,000 in rental premiums)
Sold 1000 stocks @ $11 each (received $11,000 for the sale)
Gross Profit for the trade: $2,000 (20% return on investment)
2. Our Stock Price stays the same…
We have purchased our stocks, we have received our rental premium…now at the end of the rental term we have selected, let’s assume that our stock price has stayed relatively the same as it was when we purchased the stocks, therefore below our rental price…for this example, lets say our stock is now valued at $9.90 (10c below our purchase price)
We now still own the stocks, and we still have our $1000 rental premium in our pockets, but our stock price is almost the same as our purchase price…what do we do now?
We simply rent our stocks out again!! And we will continue to rent out these stocks, month after month while the stock market is staying relatively around the same price. It is normally very hard to make money from stocks while the market is not moving, however the renting stocks strategy is a great way to make continuous income while the stock market is flat.
“ABC” Stocks Trade Summary:
Bought 1000 stocks @ $10 each (cost $10,000)
Rented 1000 stocks @ $11 each (received $1,000 in rental premiums) month 1
Stock price stayed the same…
Rented 1000 stocks again @ $11 each (received $1,000 in rental premiums) month 2
We can continue to do this month after month while the stock market stays flat.
#3. Our Stock Price goes down…
It should be quite obvious that the worst thing that can happen when you own stocks, is that the stock price can go down (and sometimes it does, we cannot help this) We are going to cover two things here (a) the stock price goes down a little, or (b) the stock price goes down a lot…
When our Stock price goes down a little:
Let’s say “ABC” goes down to $9.50 at the end of the rental period. If you don’t sell them, you haven’t lost any actual money it is only a ‘paper’ loss. So in theory, if the price has dropped from $10 down to $9.50, we are sitting on a ‘paper’ loss of 50c per stock. But since we have already rented our stock out at $11, we have made $1 per stock in profit…so we haven’t actually lost any money at this point. (bought for $10, rented for $11, stock price now $9.50)
Then, we simply rent out our stocks again for the next month. If the stock price is $9.50, we may rent them out at say $10.10 this time, and receive another 60c in rental premiums.
At that point, we’ve received $1 rental for the first month, and 60c for the next month, for a total of $1.60 per stock in rental premiums. That’s $1600 in rental premiums for the 2 rental periods.
If the price did rebound and go above $10.10 by the end of the next rental period, we would be forced to sell our stocks at $10.10, which makes us an extra 10c per stock ($10.10 less the $10 we bought them for).
So we would then end up with a total gross profit of $1700 for the trade. That’s a still return of 17% gross profit for 2 months.
And if it didn’t rebound, we would simply keep renting our stocks over and over, taking in monthly rent time and time again.
When our Stock price goes down a lot:
Sometimes, this just happens and there is not a hell of a lot we can do about it (if you don’t know what you are doing). When our stock price goes down a lot, it is really the only time that we can lose money from the Renting Stocks Strategy. Planet Wealth have a strategy to greatly limit any loss of capital.
Protecting our capital is crucial to long term success.
If we’ve spent $10,000 on buying “ABC” stocks, and it drops very badly (70-100%!) then we have lost a considerable amount of our investment.
That’s always the risk in buying stocks, but imagine if we could remove that risk! Well, we can…and that is exactly what will be covered in our next post on Renting Stocks!!
Click the Play Button below to hear my good friend Andrew Dimitri Explain Further…
Watch out for our next post that covers “Insuring Your Investment”…
Stock Market Investing Strategies and Market Speculation by..
Scott Smith
Investing The Stock Market © 2008 – 2010