Spin-Off Investing for the Individual Investor

Spin-off investing is a good place to start for the ameteur investor.  Investing in the stock market has been scary recently.  A lot of indivudual investors rely on the "pros" for their stock picks.  However, what they don't realize is that there is an easy way to get started picking stocks for themselves.

A spin-off stock is a stock that is "spun off" from the parent company.  For example let's say there is a car parts company that has a small division that sells snacks to gas stations.  The snack business is growing fast but the is so small relative to the whole company that it doesn't get much attention.  Management may decide that it is better off being run as a separate company so they decide to spin off the company to it's existing shareholders.

This process is done by giving their current shareholders shares in the new company.  For example they might give 10 shares for every 100 shares you own.  If you own 100 shares of the car parts company you will now also own 10 shares of the snack business.  There are now two companies.

This is where the ameteur investor can have an advantage.  The "pros" who run the mutual funds, pension funds, and hedge funds originally invested in a car parts company.  Now they have these extra few shares of a snack food company that they didn't really want.  Typically what they will do is sell them without doing any research on the company to see if it is a good investment or not.

When this happens it puts pressure on the share price of the new snack foods company because there are so many sellers that it makes the stock price go down.  This is where the opportunity lies.

If the individual investor puts a little time and research into this new smaller snack foods company, they may find out that it is very profitable and growing rapidly.  As the stock price goes down as the "pros" dump their stock, the individual investor can start buying a good, fast growing, cheap stock.

Over time as the company continues to grow and get larger, other investors will recognize this and start buying the stock and causing the price to go up. 

Because of a little extra homework that the big guys were unwilling to do, the small investor has a chance to make outsized returns by investing in spin-off stocks.