What Is a Flip?
Let me explain to you what a flip is in investing. It generally means a dramatic change in the direction of your investments, like switching from a long position to a short one. But depending on the type of investment or the context, 'flip' can take on different meanings. There are at least four key examples: technical trading, real estate investment, initial public offering (IPO) investing, and professional fund management.
Key Takeaways
- 'Flip' is a term that can have multiple meanings in the investment world.
- Technical traders may flip direction and change their trades based on price action.
- Real estate investors may flip a house after owning it for only a short time.
- IPO investors may buy a new stock shortly after issuance and hope to sell it at a substantial gain in a relatively short period.
- Macro fund investors may flip from one asset class to another based on rising evidence of secular trend change.
Understanding Flips
A flip, which is essentially a reversal of your position in the market, can be an effective way to generate profits from a new technical trend. People often think of flipping as a short-term strategy, but that's not always true. Let me break down the different uses of the term 'flip' in finance for you.
Technical Trading
In technical trading, you can flip your position from net long to net short or the other way around based on price action. You might do this to take advantage of a new trend, and that trend could last just a couple of weeks or over a year, depending on your strategy. Typically, a flip here means shifting from more long positions to more short ones or vice versa. For a net long to net short flip, you could sell put options at various strike prices on your holdings to profit from falling prices. In the reverse, you'd increase your long positions betting on price rises. These approaches let you profit from price reversals in securities over time.
Real Estate Investment
The term flip also applies to real estate investing, where you acquire or control assets for a short time, make some improvements, and then sell them for a profit. In house flipping, you try to buy a home at the lowest possible price, with the plan to renovate it and boost its value. Once renovations are done, you relist it at a higher price, sell it, and keep the profit difference.
IPO: Initial Public Offering
IPO investing works similarly. You buy a security at what you think is the best IPO price—maybe before, at, or after the announcement—but when you sell depends on your strategy. Company owners usually hold pre-IPO shares long-term, expecting to build value over years. But if you're not an insider or accredited investor, you might aim for quick appreciation. You buy the IPO stock low and hold until it jumps 40 to 50 percent or more in weeks or months, then sell for profit and move to the next one.
Investment Management
In macro funds that follow broad market trends, flipping happens too. If a fund manager sees high potential losses in a sector, they might flip those assets to a more profitable one. This is also useful for investors with a macroeconomic approach to their portfolios. Switching from at-risk sectors to those with better returns helps mitigate systemic or idiosyncratic risks.
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