Trading Tips

The Perfect Trading Strategy for Today’s Markets

July 22, 2019 Trading Tips
Trading Tips
The Perfect Trading Strategy for Today’s Markets
Show Notes

With the Federal Reserve talking about cutting interest rates, companies sitting on record levels of cash are looking for ways to deploy that cash. One big way is to merge with another company. It’s no surprise that late stock market cycles see a big wave of mergers and acquisitions.

M&A activity like that gives investors a lot of opportunities as well, particularly by using one low-risk, moderate-reward strategy. That strategy is via merger arbitrage.

When Company A says it will buy Company B for $100 per share, the share price will move closer to $100. The more likely the market thinks a deal is, the closer to the share price. If there’s a high probability, and shares were trading at $80, they may move to $95.

So investors who buy after the offer has been made have a high likelihood of making $5 per share by buying now. They just have to hold for a few weeks or months until the offer goes through.

While the percentage returns are usually in the 5-10 percent range, it’s an investment strategy that can be done a few times a year, depending on how quickly a merger goes through. When those returns are annualized, the end result is a decent, and usually market-beating return.

It’s a great strategy for right now, given the low risk profile. And even better, investors can get into and out of a trade in a few months. So even if the overall market takes a turn down again, these individual positions should handily beat the market.

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