What is a Flip?
A flip generally refers to a dramatic reorientation of an investment positioning from long to short. Depending on the context and type of investment, the word “flip” can mean a variety of things. There are at least four different examples: technical trading, real estate investing, initial public offering (IPO) investing, and professional fund management.
Key Takeaways
“Flip” is a term that has multiple meanings in the investing world. Technical traders might change direction and modify a trade based on price movements. Real estate investors might flip homes that they've only held for a short time. IPO investors might buy new stock shortly after it's issued in hopes of selling it at a significant profit in a relatively short period of time. Macro fund investors might switch from one asset class to another based on growing evidence of a shift in long-term trends.
Understanding Flip
Flipping, or reversing a position in the market, is an effective way to profit from new technological trends. The concept of flipping is often thought of as a short-term strategy, but this is not necessarily the case. Below we take a closer look at the different uses of the term “flip” in finance.
Technical Trading: In technical trading, investors can flip positions from net long to net short, or vice versa, based on price movements. Investors may do this to profit from a new trend, the duration of which may last anywhere from a few weeks to a year or more, depending on the trader and their strategy. In the context of technical trading, a reversal is generally associated with a shift from increasing long positions to increasing short positions, or vice versa. In a net long to net short reversal, investors can sell put options at different strike prices on the underlying holdings to profit from a price decline. In the opposite scenario, investors increase their long positions in the security, betting on a price increase. These strategies allow traders to profit from price reversals that arise from securities investments over time. Real Estate Investing: In a broad sense, the term reversal can also refer to a real estate investment strategy in which an investor acquires or manages an asset for a short period of time, makes some improvements to the asset, and then sells or flips the asset for a profit. In a house flip, investors try to buy a house at the lowest possible price. This investor is often willing and able to make renovations to increase the value of the home. Once the renovations are complete, the investor relists and sells the home at a higher price, keeping the difference as profit. IPO: Initial public offering (IPO) investing has a similar dynamic. The investor buys the securities at what is expected to be the highest IPO price sometime before, at, or after the actual IPO sales announcement, but when the buyer sells depends on the type of investment strategy and philosophy of the buyer. Company owners expect to be able to hold onto the shares issued before the IPO and do not plan to sell immediately. Typically, they expect to see a significant increase in the value of their shares over several years. However, others who were unable to buy as company insiders or accredited investors are instead looking for the quickest period of appreciation they can get from their investment. These investors may try to buy IPO shares as cheaply as possible and hold them until the stock price rises 40-50 percent or more in a few weeks or months. They lock in their profits and then try to resell at the next IPO. Investment Management: Reselling is also sometimes used by macro funds that seek to follow broad market trends. If a macro fund manager determines that the potential losses are greater in a particular sector, he may choose to resell those assets to a more profitable sector. This type of reselling can also be used by investors who take a macroeconomic approach to managing their portfolios. Reselling from a risky sector to one with greater profit opportunities can be important in mitigating certain systematic or idiosyncratic risks.
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