Earning The Points

  

LeBron ain’t the only one earning the points.

“Earning the points” is an investor colloquialism referring to when an investor has made gains on a trade. For instance, if a trader buys low and sells high (or shorts high and buys back low) they’re gaining money, i.e. “earning the points.” Points = fees.

What does that mean if you’re buying high and selling low? Yep...you’re “losing the points.” Don’t do that.

Related or Semi-related Video

Finance: What is a hedge fund?41 Views

00:00

finance a la shmoop. how does a hedge fund work? so you've probably heard a lot

00:08

about the huge fees that hedge funds charge for the privilege of managing [woman looks shocked as hedge fund is advertised]

00:12

your money. that hedge funds are only investing vehicles for the wealthy and

00:17

how mathy their employees are. but the actual workings of a hedge fund are a

00:23

lot like driving down a road in wartime. there are hills and there are valleys

00:27

your car will Traverse wanting it to speed up and slow down but as long as

00:32

you continue to drive 37 miles an hour the enemy radar can't detect you so you

00:38

drive theoretically, safely down the road. alright so how does this translate to

00:42

financial investments in a hedge fund well essentially every investment made

00:47

on an entity going up in value is usually offset by making a bet on a

00:52

different entity going down in value. that's called hedging got it? the economy

01:02

is coming out of the doldrums and you believe the entire stock market is gonna

01:06

recover but you believe the worst companies which have been down some 90% [chart showing decline]

01:10

in this bad bear market environment will actually do better over the next period

01:16

of time than high quality companies like Coca Cola which didn't decline as much.

01:21

that is yes Coca Cola stock will improve and you think it has Headroom to run

01:26

upwards some 30% in the next year and a half but you believe crap burgers

01:30

dot-com which went from $100 a share at its peak to only $2 today could

01:36

quadruple to 8 bucks in value over that same 18 months. like you get a much

01:41

better percentage return on crap burgers than you do on coke. so as a hedge fund

01:45

manager one quote easy unquote trade that you'll make is too short coca-cola

01:50

betting essentially that it will go down, and then putting the same amount of

01:55

money to being long crap burger com betting essentially that it'll go up. in

02:00

essence the bet that you are making is that crap burger will go up a lot more [Coca-Cola and crap burger stocks in two separate baskets]

02:05

than coca-cola will go up but if the overall market goes down

02:09

well you'll be hedged in that you're short Coca Cola position will cushion

02:13

the blow of crap burgers further demise and it's likely you're looking at crap

02:18

burgers balance sheet and thinking well they have $2 a share in cash and no debt

02:22

how much lower can they go .got it? hedge funds use stock options

02:26

aggressively to manage risk in their portfolios the promise hedge funds make

02:31

to investors is that their performance will be up and/or good whether the

02:37

market goes up down or stay sideways. so another common hedge trade involves the

02:42

use of put options on the market to protect the long trades the fund is

02:47

making. specifically a hedge fund might find 3 S&P 500 stocks it really likes [ put option explained]

02:52

and believes that they will be up significantly over the next two to three

02:55

quarters earnings reports. but it's also nervous about nukes in North Korea in

03:00

order to protect against a bomb going off and the whole market going down and

03:04

ruining its investment performance, and yes there are bigger things to worry

03:08

about then but that doesn't matter to hedge funds not their job. the hedge fund

03:12

goes long the three stocks it likes but it buys put options on the market

03:16

betting with those options that the market itself will go down. it's

03:21

essentially playing both sides of the fiddle so that hopefully it wins in any

03:26

set of circumstances. and yeah it's a lot more complicated than that in practice

03:29

we're just given the idea here. in the case of a put option the market might be

03:32

trading at ten thousand and a put option might have a strike price of nine

03:36

thousand such that if the market declines below nine thousand the put [strike price illustrated]

03:39

option goes quote in the money unquote and pays the investor handsomely for

03:44

making the bet that the market would go from ten thousand and well somewhere

03:47

below nine thousand. if that happened the three long stock bets that the hedge

03:51

fund made would go down but their decline would be hopefully more than

03:55

offset by the gains from the put options the hedge fund bought that were

04:00

portfolio life insurance in the case the market puked. and if that happens well

04:05

all you can really do is offer the market a breath mint and a moist

04:08

towelette and then be sure to collect your fee. [person representing stock market offered towelette]

Up Next

Finance: What are Five Questions You Can Expect to be Asked in a Venture Capital Investing Interview?
10 Views

What are Five Questions You Can Expect to be Asked in a Venture Capital Investing Interview? Why are you doing this? What DO you know? What do you...

Finance: What is a 12b1 fee?
91 Views

What is a 12b1 fee? A 12b1 fee is paid on mutual funds. The fee is paid by investors and is used to market the mutual fund to other potential inves...

Finance: What are Five Questions You Can Expect to be Asked in a Private Equity Investing Interview?
4 Views

What are five questions you can expect to be asked in a private equity investing inverview? What investments from the industry have you liked or at...

Find other enlightening terms in Shmoop Finance Genius Bar(f)