Profits In A Tumbling Market
In the last week we've seen amazing fluctuations on the sharemarket and the trend has been resoundingly downward
. What's driving this activity and how can you profit in this tumbling market?
How can you make money in these volatile times? In this article I'll look at three money-making strategies:
1. Investing for yield
2. Trading RBS E-Minis
3. Investing in cash.
Invest in yield
When you see yields of 9-10% on stable quality companies, it's the opportunity to add to the long-term portfolio. This is all about relying on income from dividends rather than capital movements in prices.
APA
Let's take the APA Group (APA) as an example.
APA owns pipelines in Australia. It's a business with stable cash flow. It currently has a yield of 9.5%.
So if you invest $50,000 in APA with a yield of 9.2%, you'll see $250,000 through dividends over 20 years. This assumes you reinvest the dividends and dividend payments remain stable.
How to calculate yields
For those of you who are interested, this is the calculation to determine the compounded value of distributions:
[Initial amount x (1 + yield) no. periods] initial amount = compounded value of distributions
In the APA example:
Initial amount = $50,000
Yield is 9.2% / 2 (since we're assuming distributions are paid twice a year) = 4.6
No. periods (which is 20 years) = 2 20
So using the formula:
[$50,000 (1 + 4.6%) 20 2] $50,000 = $252,160
HDF
Another company with a high yield is Hastings Diversified Fund (HDF).
HDF owns gas transmission assets. Once again the business has stable cash flow with a yield of 9.4%.
Interestingly, APA owns 14.5% of HDF. And there's a good chance that down the track APA may launch a takeover target of the company.
The other advantage of high-yielding stocks is that they have the buffer of dividend payments to help weather falls in the market. You get dividends whether share prices are going up or down.
Taking a short position with RBS MINIs
If the idea of investing for the long-term doesn't grab you, then how about something for the fast and furious trader?
If you are willing to take some risk and do some investigative work, you can take short positions on the Australian market through MINI Shorts (or put warrants').
RBS MINIs
The Royal Bank of Scotland (RBS) offer MINIs. They are an alternative to CFDs and other forms of leveraged share trading.
Taking a leveraged position in a falling market can be a more efficient use of your trading dollars because you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining full exposure to the market.
So since the sharemarket is falling right now, you could take a Short position and make money.
Remember, you are taking a leveraged or geared position with these warrants which means if the warrant goes your way, you are looking at inflated gains but if it goes against you, it means inflated losses.
How to trade warrants with Bell Direct
First you'll need to sign a Warrant Agreement Form before you trade warrants. If you have a Bell Direct online trading account, just go to Quotes & news > Warrants.
Once you've made your decision on which warrant to trade (eg the RBS MINI put on the ASX 200 has the code XJOKZY) click the Buy' button and off you go.
Invest in cash
If trading warrants isn't your style, or if you are jittery about the fluctuating sharemarket and want a low-risk investment strategy, you can't get less risk than cash.
The cash rate in Australia is currently 4.5%. If you are locking your money away for six months or more, you may want to consider a term deposit.
Negotiating a falling market
A falling market is one that can be one of the most challenging to negotiate. But with trading and investing tools that can help you get an edge or profit in a falling market, you no longer have to look down the barrel of just losses.
Happy trading!
Julia Lee
Equities Analyst
Bell Direct
Profits In A Tumbling Market
By: Julia Lee
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