Joseph Hogue CFA
There’s something to be said for those short-term investments with the potential to make you a lot of money in a matter of months or even weeks. I made over twenty grand on futures contracts for oil prices in a short term two month period and regularly use these kinds of investments for big gains.
So, I want to walk you through the five best short-term investments I use, and how to get started and how much money you can expect to make. Understand though that there are some big differences between short-term investments and the long-term investing we usually talk about here at Save Your Bucks.
Short-term investments are more of a bet on investor sentiment or a certain catalyst for an investment rather than investing in the fundamentals. Now, this makes short-term investments much more risky because it’s an either-or kind of idea. Your bet on the price either works out or it doesn’t in that time period.
With long-term investing, you can be right even if it takes a while to work out. Many of these short-term investments are also riskier because of the leverage you can use. With these type of short term investments you are able to bet thousands while only putting down a few hundred dollars. You can get 20-times your money or more on futures contracts. That means even a five percent return doubles your money but it also means a five percent decline can wipe you out. Short-term investing also means a lot more work. Don’t expect to be able to flip over to CNBC and get everything you need in five minutes. To make this work, you have to be ready to put in the time to really analyze an investment, understand why the price is where it’s at and why it should be somewhere else in the next month.
With all this, these kinds of short-term investments aren’t going to be for everyone. There’s nothing wrong with putting your money in a solid portfolio and just enjoying those long-term returns. No stress, very little effort and you can still reach your goals. But if you’re ready for it, these short-term investing strategies can make you a ridiculous amount of money very quickly.
Besides that twenty grand I made on oil futures, I’ve made over $37,000 over the last three years on foreign exchange futures and regularly make double-digit returns on options strategies.
Now, this is going to be an epic article on five short-term strategies including penny stocks, leveraged ETFs, Futures, Forex Trading and Options so you might want to bookmark it as a reference later. I’ll show you how to get started, some of the risks in each and some of the strategies I used for my own portfolio.
Our first short-term strategy here is probably the most popular and that’s investing in Penny stocks. Penny stocks don’t have a formal definition but generally it’s any stock that trades for under $5 a share and has a total value of less than $50 million for all its shares together. Basically, we’re talking about nano-cap stocks which are about as small as it gets with publicly-traded shares.
Now penny stocks can also be good long-term investments but because they’re so small, they tend to be extremely volatile. Just one headline good or bad can send these stocks surging or crashing and it can take years for that longer-term trend to make it a good investment. Because of that, most investors trading in penny stocks do it for a fast return catching one of those good headlines. Penny stocks are easy to trade because they’re traded on exchanges and available on most online investing platforms. There are a few risks in penny stocks that you need to understand though.
First is that there’s usually very little public information or history to make decisions on. Most big bank analysts aren’t going to be looking at these stocks because there’s just not much demand for the shares so even if the analyst can convince investors to buy, the commissions aren’t going to be very big.
Another risk is that because there aren’t many investors interested in these shares, there aren’t usually many shares traded on a daily basis. Now that’s a problem for two reasons. First, because if you want to sell quickly, you might have to take a couple of cents hit on the share prices. But also, because these stocks are susceptible to pump-and-dump scams where someone will drive the share price up with marketing, sell their shares at a profit then of course the shares crash when there’s no one actively marketing them. Remember the movie, “The Wolf of Wall Street” There are a few places penny stocks trade including the Nasdaq, OTC bulletin board and the pink sheets.
Now the Nasdaq and OTC have a little stricter listing requirement like financial reporting and then regulation by the Securities and Exchange Commission. The SEC. Those pink sheets are a fraudster’s dream though. There’s almost no regulation and very little in terms of oversight. So, I’d seriously steer clear of these stocks. Stick with those listed on Nasdaq or the OTC. You also want to just ignore any penny stock you hear about in an email or a newsletter. There are some great short-term investments out there but remember these are prime targets for scammers.
An example of a good Penny stock here is Medical Transcription Billing, ticker MTBC on the Nasdaq. Now this medical tech company is almost at $5 a share now but was just $0.75 in December 2016 when I bought shares. I worked as a labor economist for five years and I can tell you this; medical transcription and that larger healthcare tech space is hot so I started looking at this one earlier in the year.
Turns out they had some patented voice-interactive software that was hugely innovative and I thought the stock was a no-brainer takeover target. The shares jumped pretty quickly as the rest of the market caught on, but it took a little longer to really take off. I ended up cashing out at just over $2.80 a share about 11 months into the trade for a 273% return.
Now something that is going to apply to most of these short-term investments is the difference between technical and fundamental analysis. There’s a whole group of investors that only trade on the movement in the price of an investment. They measure how far the price has gone over a period or how fast and compare that to the history for that investment. This is called technical analysis. I’m not going to say much about this type of investing because, one, I’ve never used it much. I’ve followed some basic charting but stick mostly to fundamental analysis which is looking at those external and internal factors that really drive an investment.
Another reason we won’t talk about technical analysis here is, it’s debatable whether it really works unless you’re ready to make it a 9-to-5 job at your computer every day following these patterns. Now I know I’m going to get flamed by a thousand wannabe day traders with a fool-proof system but, you know, whatever. I’m working off nearly two decades of experience in equity analysis and investment management and I’ve never seen a technical strategy outside of algorithmic trading that actually makes money.
Instead, when you’re looking at penny stocks, there are some fundamental factors you can watch to make smarter bets in the share price. For penny stocks, for any stock, but for Penny stocks especially, you really have to get familiar with the statement of cash flows. That’s going to show you the cash generating power of the business and it’s a purer way of looking at the company’s financial position. Management can manipulate profits and earnings per share pretty easily, but it’s much harder to fudge the numbers in the actual cash flow.
Now, most Penny stocks aren’t going to have much cash flow but there are a few things to look for to make sure the company has the cash necessary to survive until your catalyst for growth comes out.
We’ll use Insignia Systems as an example here. Now, shares trade for just about a Buck eighty each for each developer and marketer of In-store Advertising and it’s a stock I’ve been watching for a while.
First you want to look here at the cash flows from operations, now this is something I look to for any company but especially very small companies. Ideally you want to see growth but that the company is generating positive cash flow is a must.
Here we see that Insignia Systems has booked positive cash flow for the last three quarters which is a great sign considering the company’s history. Then you’re going to look to the other sections to see where the company is spending its cash and then the change in cash at the bottom. It’s OK to have a negative change in cash if the company is spending heavily on investments but it needs to have the reserve cash to fund it.
Insignia doesn’t have much to show in these other two sections but we see it’s built up $8 million in balance sheet cash which is nearly half its market cap. Looking deeper into the financials, Insignia has no debt so that $8 million in cash and positive cash flow makes it an attractive target for an acquisition or just gives it a lot of flexibility to grow.
The best insights we have found and the one guy we follow for most of our penny stock trades is Matt. He has made us a boat load of money with his 3 Tell penny stock system. If you haven’t heard about Matt or the 3-Tell System, I would suggest you don’t read another word of this article until you see Matt’s video here:
Our second short-term investing strategy is in leveraged ETFs. Now most investors are familiar with regular exchange traded funds. These are funds managed to hold an index or investing theme by actually holding the investments in a certain percentage. So, you might have the Technology Sector SPDR, the XLK which holds shares of 67 Tech companies. For the ability to buy and hold all 67 of these companies with one trade, you pay just 0.13% a year as a management expense fee. Now leveraged ETFs are special funds created to multiply the returns on a sector or theme. Instead of holding the shares, they create that 3-times or the double-returns with a combination of swaps and derivatives.
Let’s look at a table of the most actively traded leveraged ETFs as an example. You have the name and fund symbol. Leverage means how many times the fund should move versus the sector so if tech stocks increased by two percent you would expect this first fund to jump by six percent. The focus column is the theme or sector in which the fund invests and the position is whether the fund benefits when the sector rises or falls.
So, if you are in a short fund, a negative position, the price of the shares would go up if that sector fell. There are leveraged funds for all kinds of themes including sectors like technology, energy and healthcare to emerging market country stocks like China and Brazil. These leveraged ETFs are traded just like stocks so you can buy and sell on any online investing platform. Now there are some important things to know about these, some that mean these should only be used for short-term trading.
First is that the expense ratio on these funds tends to be about twice what you pay on other ETFs so it’s definitely not something you want to hold for the long-term. If you want to leverage a long-term bet on a sector, it’s a better idea to go with options which we’ll talk about later.
Also, Leveraged ETFs are rebalanced daily, which means the portfolio manager has to buy and sell the financial products to maintain that 3:1 ratio. This creates a drag on the fund so the actual return isn’t usually exactly that three-times the return on the sector.
What leveraged ETFs are good for is that very short-term bet or protection on a trading idea. For example, if you were heavily invested in tech stocks but afraid that the sector
would drop hard in the next month, you could invest in this ultra short SQQQ to actually make money and not have to sell out of your shares.
Our next short-term investment is Futures contracts on things like metals, currencies and agricultural goods. Futures are financial contracts to buy or sell something at a set date and price, usually in the next month or few months. Most futures contracts are bought or sold as a way to reduce risk. For example, a farmer might sell October contracts for wheat.
The contract sets a price they’ll get months in advance so they don’t have to worry about prices in the meantime. On the other side of that, a food processor like General Mills might buy those contracts so it locks in its price for that wheat it needs to make your breakfast of champions.
Futures can also be used for investment though. You can buy those contracts for wheat if you expect the price to go up then sell them before the delivery date. But here’s the beauty of futures contracts, you can buy contracts worth hundreds of thousands of dollars for just a few grand.
For example, each single contract for West Texas Intermediate or U.S. crude oil, is for one thousand barrels. Now at the current price around $70 a barrel, that would mean $70,000 thousand per contract to buy or sell depending on what the futures price was. But you’re only required to deposit about $3,500 for each contract.
So, you can bet on the price of 3,000 barrels of oil for about $10,000 dollars. That’s about 20-to-1 times your money. So, let’s do the math here and this is an actual trade I made in 2016 after the price of crude had bottomed in February at around $26 a barrel. By March it was clear that prices had gone too far and were on the rebound, so I bought two contracts for $38 a barrel for May delivery. The current or spot price at this point was just under $36 bucks so the market was expecting price to go a little higher but not much. I put down $7,000 for the three contracts worth $114,000 but this was actually more than I needed to deposit. I could have put down as little as $5,700 for the investment.
Crude prices kept climbing and by May had reached $45 a barrel when I sold my contracts. Remember that each contract is worth 1,000 barrels so the three contracts were now worth $135,000 or a gain of $21,000 from the original price and I had made three-times my investment in two months. That’s potentially a 4,000% annualized return or 40-times your money, but like all the jackpot investments we’ll talk about there’s a huge risk.
If the price had gone the other way, I could have easily lost my entire investment in a heartbeat. In fact, I remembered one trade in 2012. I was trading gasoline futures and there was an explosion at a Canadian refinery overnight. The price of gasoline spiked like four percent, and since I had shorted the contract, betting the price would go down, then I lost over Ten Thousand dollars on the investment. There are five types of assets that trade with futures contracts. You can buy or sell energies like oil, gasoline, heating oil, natural gas and ethanol. There are contracts for currencies with the dollar, Euro, British Pound, Yen and Mexican Peso all heavily traded. You can buy or sell contracts on the direction of the stock market.
Finally, there are contracts on the metals including gold, silver, aluminum and copper. And almost any agriculture commodity will have a contract so corn, wheat, soybeans, rice, coffee, cattle, hogs, you name it.
Most online investing platforms will allow you to open a futures account with a broker. There is a lot more than goes into futures trading, determining where you think the prices gonna go and setting up your investments. I’ll do a video exclusively on futures because it can be a really amazing investment. A few tips here though.
First, always understand the downside and catalysts for the trade to go the wrong way. You also want to set stop orders so if the price goes against you, you don’t lose too much money. It’s also a good idea to trade in a few different types of investments so that if one trade is losing money, then maybe a few others are going to support your profits. One thing that’s going to be important for futures and for forex trading which we’ll talk about next is to focus on a specific asset in the market. You can’t expect to be successful if you’re trying to trade every contract available, if you’ve got bets on metals and currencies and Agricultural products. To really make money in these investments and see the turning points in the price, you have to become an expert in the asset.
That means understanding the current political environment in key supplier countries for the metals, understanding how potential interest rate changes are going to affect the asset. For each asset, there are a list of factors to watch for and understand so you can make a smart bet on the price.
This next investment, Currency Trading, is part of that futures idea but I really like this one so wanted to give it its own section. Most investors don’t know it but the foreign exchange or forex market is actually the largest in the world with over $5 trillion traded every day, that’s versus less than a fifth that for stocks. Forex offers some of the highest leverage also with 50-to-1 bets and even higher for day trading.
Now, currencies are always traded in pairs, usually the value of a currency versus the dollar. There are dozens of currency pairs available but like all the short-term strategies, it helps to focus on a few to limit the amount of research you need to keep up with.
Through buying or selling these pairs, you’re betting that the value of one currency is going to be higher or lower versus another. What I like about forex is that the biggest factors that affect currencies are big economic forces like growth, interest rates and capital flows.
Since these are all regularly reported, you can trade forex exclusively around the releases of these reports. That’s something you can’t necessarily do with a lot of the other futures. When I was trading energy futures, I was constantly trying to keep up with all the kinds of supply and demand headlines. Futures trade 23 hours a day so you can be waking up at 2:00 am worried about your trades and it’s a constant stress.
So being able to just put on a futures position ahead of an economic release and then take your profits afterward is a good way to limit that round-the-clock stress and that amount of research you need to do.
Forex trading has gotten a bad rap over the years and with good reason. I think it is foolish to go at this alone with out taking advantage of the bots and other tech that is available to all of us today. However some lone rangers think they are smarter than bots, it is kinda funny and sad at the same time. If you would like to learn more about the number one trading community in the world, you can click here. Personally I wouldn’t make a move without them.
Our next short-term investment is through Options Trading. Now, options are contracts to buy or sell stocks but with a very important difference from Futures. Buying an option gives you the right to buy or sell a stock but not the obligation.
So, there are two types of options. A call option gives you the right to buy shares while a put option gives you the right to sell shares. When you buy or sell an option, you’ll see an expiration date which will always be the 3rd Friday of the month, you’ll see a strike price which is the price of the shares for that option and you’ll see the price of the option, the premium.
Let’s look at an example to make it easier. We see here that shares of Apple are currently trading just under $204 per share, this is mid-November. Now I’m looking at the January 2019 options so this investment will expire on January 18th in a couple of months. So, I can buy call options at $200 per share which means I can get the right to buy Apple for $200 a share in January, that’s the strike price. Now for the right to do this, I have to pay about $12 a share, that’s called the premium on the option. So, if I pay $12 for the right to buy Apple at $200 in January and the price of the shares goes to $240 by that time what does that mean for me?
That option would now worth at least $40 right, because if it was less than that $40, someone could just buy the option and then sell the shares immediately for a riskless profit. But instead of buying the shares, I could just sell the call option for $40 and a return of 233% on my money. Each option contract is worth a hundred shares so one contract would have cost me $1,200 and I could sell it for $4,000 or a profit of $2,800 for each contract that I bought. Remember, options come in two types, Calls and Puts.
So, if I thought Apple shares might fall then I could buy a put option which would give me the right to sell shares at a certain price. Going back to our example, I could get the right to sell shares at $200 for $7.59 per share. If the price goes down to under $192.41 by January, so that’s $200 strike price minus what I paid for the right to sell the shares, then I’ll make money on the bet. Options can also be used for protection and this is primarily how I use them.
So, if I own shares of a company and I’m worried about the price going down over the next few months, I can buy a put option for the right to sell my shares at a certain price.
I’ve effectively locked in that price as the lowest I’ll get on the stock even if the market price falls further. The important thing to remember here is that buying an option gives you the right but not the obligation to buy or sell a stock. So, if I buy those call options on Apple and the share price isn’t above $200 by January, I sure as hell am not going to buy them for $200 each. I would just let that option contract expire but I would lose the $12 per share I invested.
Similarly, if I bought put options against a stock, I own and the price of the shares didn’t fall then I’d just hold on to the stock. The price I paid for the put options would be gone but they did their job, protecting me from any short-term weakness.
Now, the payoff for those Apple options wasn’t huge because that strike price was very close to the actual price, so we weren’t betting on a big move in the shares. Let’s look at another example to see how options can make you rich. Here we have January options for shares of McDonald’s. I’ve picked McDonald’s because it’s a stock that doesn’t normally see big changes in the share price.
That’s important for options trading because its gonna be built into the price you pay for each contract. If the shares jump around a lot, it will cost more for the right to buy or sell the shares because there’s a higher chance the shares will be much higher or much lower by expiration. But say we’re expecting shares of McDonald’s to absolutely tank by January from trading at about $182 per share right now. Maybe we have a lawyer connection that says Ronald McDonald is being sued for alimony or John Amos has just opened up a McDowell’s down the street from every restaurant. Either way, the happy meal ain’t so happy.
So, we can buy a put option to sell the shares for $145 each and pay just $0.36 or $36 for each contract since an option contract is worth a hundred shares. Now if shares of McDonald’s plunge 35% by January to $118 then our put option is worth at least $27 each because we have the right to sell those shares for $145. That $36 we put down for each option contract is now worth $2,700 or a Seventy-four Hundred percent return.
To trade options, you only have to be approved on your online investing account. That’s usually requires a minimum of a few thousand in the account but that’s about it. Like I said, I generally just use options to protect my investments or to make a little extra money from them but you can make a lot of money very fast. There are some different options strategies you can use but the idea is just that you need a strong reason to believe the price is going to rise or fall quickly.
You have millions of other investors looking at each stock and all their expectations for that stock price are built into the options prices so that average market expectation has to be wrong for some reason.
Now in my example above, finding out from your lawyer friend about Ronald’s legal troubles would be insider trading and you’d go to jail but there are a lot of other ways to find why you think a stock should be much higher or lower.
Again, I would suggest having options bets in several stocks to diversify your risks. Stop loss orders can also work here to limit your losses and don’t feel like you have to make an option bet on every stock you think should be higher or lower. Be selective where you place your money. Each of these short-term investments could be an entire series of videos.
I’ll be writing articles for options trading and futures soon so watch for those.
I’d love to hear from you in the community, what are your favorite quick investments and how do you trade them so scroll down and tell us in the comments below. We’re here with the best information on beating debt, making more money and making your money work for you. If you’ve got a question about money, just scroll down and ask it in the comments and we’ll answer it in future Articles.
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