Renting Shares Case Study

Disclaimer: The information provided herein is for educational purposes only. You should not make investment decisions based on this information. For financial advice you should seek the services of a qualified Financial Advisor.

The renting shares strategy is one of the safest strategies around but one that can deliver a whopping 2% to 5% per trade; or around 15% to 40% per annum including costs. It’s so safe in fact that you’re able to do it in your IRA account. It’s a perfect cash flow strategy because you get money into your account the day you do it, and you don’t need to be in front of the computer all day. So let’s get started in understanding this renting shares strategy. Let’s first look at how this renting shares strategy works and why it is so good in lowering risk and giving such great returns.

The principles of renting shares are similar to renting out your house.
When you rent out your house, the tenant pays you a rent every month for the use of your house.

When you rent out your shares you receive a premium (another word for rent) and for this you give the other party the use of your shares. For example, say I own 2000 shares in Microsoft that I bought for $28 ($56,000 investment).

I decide to rent out my shares for a month and when I do this I receive say $0.80 per share i.e. $1600 (2000 shares x $800 = $1600). Don’t worry about how this happens for now – just focus on the strategy.

The $1600 is deposited to my trading account that same day and it’s mine to keep – I never have to give it back (same a renting out my house). So I’ve just received $1600 for a month’s rent of my Microsoft shares.

That’s pretty straight forward.

Now the difference between ‘renting your shares’ and ‘renting your house’, is what you’re actually providing to the tenant – in the case of ‘renting your house’, you are giving them the right to occupy your house in return for rent. Whereas in the case of ‘renting your shares’, you are giving them the right to buy your shares at a pre-agreed price in return for rent.

For example, I rented my $28 Microsoft shares and received 0.80 per share ($1600 in total for my 2000 shares). The rental agreement, for which I received my $1600 rent, might have been that I agree to sell my shares at a price of $29.

Again, don’t worry the mechanics of agreeing on the sale price, or the rental premium or even finding someone to rent your shares – this is all done for you by the stock exchange. I’ll explain more about this later.

So things are still pretty straight-forward, right? We rent our shares, and we receive cash for doing this, the rental premium. When we rent our shares we are giving the tenant the right to purchase our shares at a pre-agreed price – in our example we bought the shares for $28, and we’ve agreed to sell at $29.

Now in explaining this stock investing strategy I always get the same four questions…

  1. Why would anyone pay me to buy my shares at a higher price than I paid for them, or a higher price than they’re currently trading?
  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?

Let’s look at each of these questions… click here