In part five of the series on special situations, I’ll briefly present the idea of risk (or merger) arbitrage.
This series is based on the book You can be a stock market genius! so for additional information, be sure to read it yourself.
New here? Catch up on the series.
There is no point in buying a stock speculating that the company will be taken over. Risk arbitrage, which I will just refer to as arbitrage, involves the purchase of a stock after the merger announcement.
The book quickly gets to the point and tells the reader to avoid arbitrage because of the high levels of uncertainty involved in the process. However, I would like to add that by waiting and choosing wisely, you will be able to make very good gains off low risk.
The basics and overview can be found in an earlier post here. It covers topics such as why you should consider arbitrage in your investing strategy, the types of homework you should do, what to look for and the risk involved.
So far, I’ve gone through three arbitrage opportunities in this blog. Aquila, Jazz Technologies and currently Puget Energy. I eeked out a tiny profit with Aquila and documented a vital mistake with this transaction, successfully did not partake in the Jazz merger due to the illiquidity and stock for stock condition, and would like to see the Pugest Energy merger close out soon.
There are also different forms of arbitrage.
Before you invest any cash, you should be able answer all the items below.
But most of all, stick to investing in solid companies if you are unsure or feel uneasy with the whole notion.
Disclosure: Long PSD
[tags]arbitrage, special situation, PSD [/tags]