How to Invest in Company Takeovers through the Stock Market

You may think that investing is not for you. Traditional theories say that when investing it is impossible to beat the market. This is founded on the belief that the market aspects in every society factor instantaneously, allowing for no advantages unless you are an insider. But you can if you just follow the stock market news!

One of the best ways you can make money is to watch for takeovers. Lets say Company A is buying Company B for fifty dollars a share. Company B’s stock is only at $30 though. Nearly instantaneously, the market adjusts its price, moving it into the 45-55 range. This is where the traders with the fastest computers and most up to date news can win. For the average Joe’s, this is not where you make your money.

Continuing with the example, stock B should fluctuate around in the 45-55 range because people know that on the date of the acquisition, it will be worth 50. As it hits the bottom of the range, buy calls that are deep in the money. These cost much more, but allow you to take gains on a much shorter move.

In case you don’t know, here’s a basic review of options. Options are a way to risk a smaller amount of money and take the gains on a larger amount of stock. The problem is, if the stock price doesn’t finish above what you paid for it (or below, when using puts) you either lose everything or have to take the delivery of stocks.

Each option represents the gain or loss on 100 shares of a stock. They are priced as one share, so you have to multiply by 100 to know how much they will cost you. A current example is a $160.15 stock. It has a call at 150 that costs $10.50.

Adding the two of these together, you see that you need the stock to move to 160.50 to make money. The option will cost you $1,050, and will take in the earnings off of 100 shares, which you would normally need to risk over $16,000 to get.

So lets say this stock rises to 170. You could then sell the call for $20, netting $9.50 per share, or $950 over the whole call. Back to our Stock A and B. Using calls, you can make the money as it fluctuates up, then, once it gets above 50, sell the calls and buy puts.

Another way you can make money is through share offerings. When a company announces a share offering, their stock price falls. Often times, human emotion causes the stock to fall farther than it should. This is when you capitalize on it. Contact your broker, and see if you can get in on the share offering.

These are great deals, since selling pressure from it can only last so long, and this often happens when no other fundamental data has changed. This gets you the stock at a discount without having it being a stock that’s worth as little as you bought it for.

The bottom line is: Don’t listen to traditional stock wisdom like “buy and hold”, “mutual funds”, and “not being able to beat the market.” With a bit of quick thinking and watching financial news, you can beat the market!