Stock Market Strategies - Renting Shares or Stocks

The technical term for Renting Stocks..or Renting Shares is called "Selling A Call Option" but for now, we will just call it renting shares to make it easier to understand. When we buy shares or stocks, we have many options other than just sitting on them and waiting for the share price to rise (most people think that is all there is to the stock market and investing!!). What we can do with our shares is rent them out, think of it like this...if you own a house, you are the landlord and you can rent your house out to someone at a price that is determined by you. You can do almost exactly the same thing with the shares you own. As share owners, we get to determine the price that we want to rent our shares out for, and we also choose rental period.

HOW DOES THE RENTING SHARES STRATEGY WORK?

WE NEED TO BUY SOME SHARES OR STOCKS FIRST...

The first thing we need to do if we want to make some money by renting out our shares, is to actually buy some. So let's say we buy 1000 shares with a company we will call "XYZ" and these shares cost us $20 per share, making the total cost to us $20,000. Once we own these shares, we can then think about producing an income by renting out those 1000 shares. With Planet Wealth you have the luxury of being able to buy the exact shares that we buy (at the same time we buy them!) this takes the guess work out of it for you.

WE CHOOSE THE PRICE WE WANT TO RENT OUR SHARES OUT FOR...

What we need to do now is choose a price that we want to rent our shares out for. We generally choose a price that exceeds the price we paid for the shares, for this exercise let's say that we choose to rent our shares out for $21.50 each.

NOW WE CHOOSE A RENTAL TERM FOR OUR SHARES...

When we decide to rent out our shares, we get to choose the rental price and also the amount of time we are prepared to rent our shares out for. With our Renting Shares Strategy, we generally try to rent out our shares monthly, so in this example we will use a 4 week rental term. So, for this example we have bought our shares for $20 and rented them out for $21.50 for a period of 4 weeks, this means that we have received $1500 in rental premiums. This money will be deposited into our account the very next day, once we have told our broker to rent our shares. This income is ours to keep, and it does not matter what happens to the price of the shares in the 4 week period....the price of our shares can go up, down or sideways, and we still get to keep our rental premium.

The 4 Steps Involved in Renting Out Shares...
1. Choose and purchase your shares
2. Set your rental price
3. Choose how long you want to rent your shares out for
4. Receive your rental premium into your bank account within 24 hours

What Can Happen During The Rental Period?
1. Our Share price can go up
2. Our Share price can stay the same (or move minimally)
3. Our Share price can go down (a little, or a lot)

How can these share movements effect us, when renting our shares...

1. The Share Price is higher at the end of the rental period...
We have purchased our shares, we have received our rental income...now at the end of our rental period, let's assume that our share price has gone up to $21.75 (which is 25c more than we had our shares rented out for)

When the share price is higher than the price we have rented the shares out for at the end of the rental period ($21.50 in this scenario), our shares will automatically be sold at the rental price of $21.50 (our rental price), we are more than happy when this happens, as it means we make even more money from our trade.

"XYZ" Shares Summary (for the rental term of 1 month):
Bought 1000 sharess @ $20 each (cost $20,000)
Rented 1000 sharess @ $21.50 each (received $1,500 in rental premiums)
Sold 1000 stocks @ $21.50 each (received $21,500 when our shares were sold)
Gross Profit for the trade: $3,000 (15% return on our $20,000 investment)

2. The Share Price is about the same at the end of the rental period...
We have purchased our stocks, we have received our rental income...now at the end of the rental period, let's assume that our share price has stayed almost the same as it was when we purchased the shares, therefore below our rental price...for this scenario, let's say our shares are now valued at $19.90 (10c below our purchase price)

We now still own the shares, and we still have our $1500 rental income in the bank, but our share price is almost the same as our purchase price...what happens now?

We just rent our shares out again!! And we will keep renting out our shares, month after month while the stock market is staying relatively around the same price. It is normally very hard to make money from shares when the stock market is not moving, however the renting stocks strategy is a great way to make continuous income while the stock market is flat.

"XYZ" Shares Summary:
Bought 1000 shares @ $20 each (cost $20,000)
Rented 1000 shares @ $21.50 each (received $1,500 in rental income) month 1
Share price stayed at a similar price...
Rented 1000 shares again @ $21.50 each (received $1,500 in rental income) month 2
We can keep doing this every month while the stock market stays flat.

3. The Share Price goes down (a little, or a lot) at the end of the rental period...
It is a fact that the worst thing that can happen when you own shares, is that the share price can go down. We are going talk about 2 things here (1) the share price goes down a little, or (2) the share price goes down a lot...

When the share price goes down a little: Let's say "XYZ" goes down to $19.00 at the end of the rental term. If you don't sell these shares, you haven't actually lost any money, at this point it is only a 'paper' loss. So in theory, if the price has dropped from $20.00 down to $19.00, we have a 'paper' loss of $1 per share. But since we have already rented our shares out at $21.50, we have made 50c per share in profit%u2026so we haven't actually lost any money at this point. (bought for $20, rented for $21.50, share value is now $19.00)

What we do now is simply rent our shares out again for the next month. If the stock price is $19.00, we may rent them out at say $20.20 this time, and receive another $1.20 in rental income per share.

At that point, we've received $1.50 per share ($1500) rental for the first month, and $1.20 per share ($1200) rental for the next month, for a total of $2.70 per share in rental premiums. That's $2700 in rental premiums for the 2 rental periods.

If the price did rebound and go above $20.20 by the end of the next rental period, we would be forced to sell our stocks at $20.20, which makes us an extra 20c per stock ($20.20 less the $20.00 we purchased the shares for = $200).

So we would then end up with a total gross profit of $2900 for the trade. That's a still return of 17% gross profit for 2 months.

And if the share price did not rebound, we would keep renting out our shares over and over, taking in monthly rental income over and over again.

When the share price goes down a lot: Sometimes, this just happens and there is not a lot we can do about it (if you don't know what you are doing). When our share price goes down a lot, it is really the only time that we can lose money from the Renting Shares 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 $20,000 on buying "XYZ" shares, and it drops a lot (70-100%!) then we have lost a lot, or all of our investment.
There is always a risk in buying shares, but imagine if we could remove that risk! Well, we can...and that is exactly what will be shown below.....

What We Do Is...Insure Our Shares

Whenever we buy stock in our Renting Stocks portfolio, the first thing we do is buy insurance to protect the stock in case of a big fall in price.

If you are a landlord and you buy a house and rent it out, the first thing you do is insure that house. You want to make sure that if your tenants don't pay rent, or if they damage the property, or even if they burn it to the ground, you are covered for any losses.

No-one buys a house without insurance, and we apply the same principle to our Renting stocks portfolio.

Whenever we buy stocks, we spend a little of our rental premium to buy insurance.
However, we don't insure 100% of our stock price, because if the stock price only drops a little we can easily make this up from rental premium, as in our previous example.

It is only necessary to insure against a really big drop in price, therefore we only buy insurance a few dollars below the current stock price (which protects the bulk of our money, but not all of it).

The reason for this is the cost of insurance is very high if you want to insure 100%, and it eats up all our profit from renting the stock in the first place.

As a general rule, we aim to spend between 20-40% of our rental premium on insurance costs.

For our example on XYZ, we buy insurance at $15, which costs us 30% of our rental premium. Our rental premium was $1500 for our 1000 stocks, so that means we spend $450 to insure our stocks at $15.

In summary, after we receive our rental ($1500) and buy our insurance ($450) we end up with $1050 of income.

Now that we have insurance, we have a guarantee we can sell our stock at $15 - regardless of its current price - at any time before the rental period expires.

Let's look at the worst case scenario: Something happened to XYZ and the share price dropped considerably, let's say all the way down to $5.
If we didn't have insurance, we would be looking at a loss of $15.00 per stock, or $15,000 for the trade. That's a big chunk of our initial investment, which was $20,000.

While we could live with that, it would take a long time in renting our stock out again and again before we could make up that loss.

Imagine if the absolute worse case scenario happened - the company went broke - making the stock price zero. That would mean we've lost ALL of our investment! That's nothing short of a disaster. But here's the good news...
Because we have insurance, we have a guarantee we can sell the stock at our insurance price of $15 (even if the company goes broke).

That means we have only lost $5.00 per stock, or $5000 which is not too bad considering other investors who did not insure their stocks would have lost $20,000!

That's the most we can ever lose, even if the stock price goes to zero!
Again, when we buy insurance, we have a guarantee we can always sell the stock at that price, no matter what happens. The stock could drop 50%. It could drop 90%. It could go completely broke and not exist anymore.
Regardless, we will always receive the price we insured our stock at (in this case $15).

In a balanced portfolio, we manage our risk so the most we can lose is only ever a small percentage of our total capital. So even if we are unlucky enough to be on some really big losers, the loss is still only small, and our ongoing income from keeps us well in front over a period of time.

Buying insurance is one of the key components to a successful Renting Stocks
portfolio, and one that means we are not at risk from disastrous one-off events (eg. September 11) or market crashes. In summary, we ALWAYS protect our capital. That means we can sleep at night without worrying about substantial losses, even in the middle of the worst financial turmoil, bear markets or stock market crashes.