Why would anyone pay me to buy my shares at a higher price than I paid for them?
People enter into agreements to buy shares at a future date like this all the time. Why? Because the person who pays you for your promise believes that the price of the shares is going to increase before the end of next month. If the current stock price is say, $21.00, they might think the price will rise to $22.00 by the end of next month.
If this happens then the person who paid you will be able to buy your shares for $21.00 and sell them for $22.00, making a $1.00 profit. If we subtract 50 cents for the rent they paid you, then that’s a net profit of 50 cents. They only put up 50 cents (the fee they paid you) so if they are right and the shares do go up to $22.00, then they have made a 100% return on their money in a little more than a month.
Now look at what’s happened to you in this stock investing agreement. You bought shares at $20.00 and received a 50 cent fee when you sold the right for someone to buy your shares at $21.00. If the shares don’t reach $21.00 by the end of next month, then you get to keep the fee paid to you, plus you get to keep your shares. How good is that?
Now if the stock price rises to $22.00, you will have to sell your shares for $21.00 making a $1.00 profit. PLUS you get to keep the fee paid (you keep this fee regardless of what happens). So you will have made a total profit of $1.50. That’s a 7.5% profit for you in a little over a month.
So you can see that in this agreement both parties win. The difference is that the person paying the fee for the right to buy your shares is taking a bet that the stock price will rise. You on the other hand are happy to take their money, just like a lottery company takes money from people, because you know that no matter what happens you win. And do you know what you do the following month with this stock investing strategy? Yep that’s right, you do the same thing again.
Now be aware that if your stock rises to say $30.00 you’ll need to sell your stock for the pre-agreed price of $21.00.
But what generally happens when stock rise sharply like this? That’s right they tend to fall again. So you can miss out on some upside but in return you are getting cash flow.
If you want to test what return you’d get if you did write covered calls versus if you didn’t, you could take a look at this Stock Market Simulator. It lets you test and practice without risking your money. Click here… Paper-Trader
Generally they don’t rise so sharply and even if they do rise it’ll usually end up not much higher than the $21.00 in our example. So you’ll usually get to keep most of the profits. If the stock price does rise and you really don’t want to sell you shares, I’ll show you how you can “buy back” your agreement.
CONTINUED…
1. Why would anyone pay me to buy my shares at a higher price than I paid for them?
2. How do I find someone to enter into an agreement like this?
3. How do we agree on the sell price, the fee and the date?
4. What’s the catch?
5. The Technical Stuff
Check out the answers by clicking on each question. If you have a specific question, ask it at our New Stock Market Forum. Be the first to ask a question.
Disclaimer: This information is provided for educational purposes only.
Tags: investing in shares, investing in stocks, Renting Shares, renting stocks
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