If you’re like most people, you probably have a few dollars in loose change rattling around in the bottom of your purse or pocket says Brian Colombana. When you rediscover it next, why not use that money to make even more money? You can invest your spare change every day in the stock market with no additional effort on your part at all. If you’re like most people who average less than $13,500 per year in retirement savings — including those lucky enough to have pensions — making an extra 18% or so per year on your savings is a heck of a lot better than leaving them languishing in an interest-free checking account.
The trick is called “round-turn trading” and its how some people are earning up to 45% annualized returns investing their loose change. Here’s how it works:
- Every day, institutions are liquidating stocks they hold in their portfolios — frequently small companies that hit some bump in the road and required capital to help them over it. For these institutions, liquidating means selling the stock of the company to recoup cash they will then use for more promising investments.
- When institutions liquidate a stock, they have two options: sell all of it on one day or on several different days. Institutional investors who want to avoid drawing attention to their trading activities frequently prefer to liquidate by using “odd lot trades.” An odd lot trade involves fewer shares than standard round lots of 100 shares each. The institution can sell 3,000 shares on one day rather than 100 lots of 300 shares each over three days. A $100,000 trade on one day is easily hidden in the shuffle of billions of dollars of transactions that take place daily.
- Of course, if you sell an odd lot trade yourself (that is, rather than selling it through your broker), your brokerage charges extra fees for this service. An institution’s fee to sell 3,000 shares at once is usually less than its fee to break up that same sale into three different transactions over three days. When institutions sell thousands of shares of a stock quickly all at once, they’re often dumping weak investments and paying lower capital gains taxes too says Brian Colombana.
- The opportunity arises when another investor — perhaps another institutional investor like a hedge fund manager or even an individual retail investor snapping up stocks cheaply — finds the stock attractive. If the new buyer is willing to buy 3,000 shares at once rather than 300 lots of 100 shares each over three days, he or she can pay only slightly more per share — perhaps a penny or two — for that lot.
- The sellers who are dumping their weak investments typically don’t know what they’re doing if they’re not institutional investors with sophisticated trading departments. The best way for them to sell 3,000 lots of 100 shares each over three days would be through their designated broker-dealer allocation desk. Unless there’s some special reason why these institutions are dealing with you instead of their preferred brokers, though, it will probably never occur to them that they could have sold the same stocks faster and cheaper through you says Brian Colombana.
- (If you’re a stock broker, by the way, and you don’t have an allocation desk at your firm yet, get one! No investor is going to hire you as their personal financial consultant if they can’t use your services to liquidate their investments quickly when they need cash.)
- Now that we’ve established how odd lot trades happen and why some investors would be willing to pay more than usual for odd lots, here’s the critical point: You can profit from this market inefficiency by buying up these underpriced stocks and liquidating them quickly at full price .
- You may not want all 3,000 shares of a $1 stock even if it costs just $3.00 per share. However, if you can buy those shares for $3.10 and sell them for $3.20, you can make a quick 10% on your money by round-turn trading. This technique is called “round-turn trading” because the investment is turned over completely one time.
- Don’t let that scare you off — remember that this strategy just means you’re turning your money over once instead of three times over the course of a week. The principle behind it isn’t any different: You’re still getting market inefficiencies to work for you instead of against you so that you can compound your money quickly at low risk.
If you’re willing to put in the effort, focusing on buying and selling odd lot trades can help you compound your money faster says Brian Colombana.
The art of round-turn trading was first described by Alexander Elder in his book trading for a Living, which I have written about here.