Some of the most successful investors have developed very effective investing tricks that help them appear to magically master the market. In fact, these tricks beat the system so easily that it almost seems illegal.
But they aren't breaking the law or using magic; through hard work, research and knowledge, these investors have learned that winning in the markets is not an accident. And anyone can do it -- legally.
Don't believe me? You too can use these same investing tricks to take full advantage of existing market tools and potentially make big gains.
Investing Trick #1: Start a Business to Invest in a SBO-401(K)
If you have lot of money to invest and you or your spouse has an owner-only business, you can take advantage of a SBO-401(k). These plans -- which can go by the names Uni-K, Solo 401(k), Self-Employed 401(k) or Individual(k), depending on the financial institution -- allow you to maximize the benefits of your 401(k) for higher maximum contributions and can help you consolidate your other retirement accounts.
In one of these plans, you can contribute as much as 100% of your of your business' net income up to $16,500 a year if you are less than 50 years of age, or $22,000 if you are over 50.
The business may also contribute up to 25% of your compensation or 20% of modified net profit for unincorporated business owners. Like other qualified 401(k) plans, you can also borrow up to 50%, or $50,000, of the balance of the SBO-401(k).
[These contribution limits are changing: 2012 Tax Law Changes Affecting Your 401(k) and IRA]
Investing Trick #2: Writing Covered Calls
What if you could earn monthly checks from stocks and ETFs you already own? You can by writing out of the money (OTM) call options against them. You need to own at least 100 shares of a stock or ETF, and also need to get special permission from your broker to sell options. If you do, the rest is relatively simple, says Mike Scanlon of Born to Sell.
'If you have 100 shares of Apple (NYSE: AAPL), you have stock in a great company but they pay no dividends,' said Scanlon. 'However, you can fix that with covered calls to get 12 payments a year from Apple.'
At the time of this writing, Apple closed at $374. You could sell 415 strike options with an expiration date (19 days out) for $500. What that means is if the stock is below $415 before the expiration period, you keep the $500 and your stock and the deal is done.
If Apple rose 41 points in 19 days then your stock will be called away and you will receive $415 per share for it. Plus, you keep the $500 you got when you sold the option, so it's really like getting $420 for your shares when they are at $374 today.
If Apple takes off and is worth more than $415 by October 22nd, then you may not make as much as you could have, but you've still made good money (41 points on the stock plus 5 points on the option, all in 19 days).
'To many people it seems like free money and there must be a trick. No trick. It's been going on since 1973,' said Scanlon.
[Use our guide to learn more about writing covered calls: Options: When to Sell, Not Buy]
Investing Trick #3: Decode Insider Buying
Insider trading is against the law. Ask Martha Stewart about that. But there is something similar that is legal.
From the upper executives and directors to the lower level management, no one knows how well a company is doing better than the company's own employees. So what if you could find out when these employees bought and sold company stock? The information on employee trading is easier to find than you might think.
Using a free stock screener online, such as this one from FINVIZ.com, you can see how many insiders are holding shares of their own company and see how much trading activity has occurred. Simply view stocks based upon recent insider buying to see where shares are being purchased. You can also sort stocks by insider selling using these same tools. The software will even let you see which executives within a given company has bought and sold shares of their own company stock.
[See our guide on how to effectively and legally 'insider' trade: The Profit Secrets of Insider Trading]
Investing Trick #4: Using Your Home as a Margin Account to Invest in REITs
Warning: Don't try this with your home. But, if you're willing to risk losing your house you could potentially make some money by tapping its equity and using it as a margin account.
For investors who own a home and can get a home equity line of credit, there is an opportunity to get a return with an investment that will earn more interest than the variable rate (especially if interest rates stay as flat as they are). Ideally, you want an investment that has 1) little to no stock market volatility and 2) the ability to be cancelled easily so it can be sold at or near cost in order to pay off the HELOC; that's where public, non-traded Real Estate Investment Trusts (REITs) come in.
REITs are a great way for an investor to invest in commercial real estate. Here's how this trick works: If you secure the home equity loan at variable 3.5% (the current prime rate), you can use the borrowed funds to invest in a REIT and earn a return of 6% or greater. Borrow cheap, make your money work in REITS, then pocket the difference.
Yes, HELOCs are traditionally used for home improvements and upkeep, but it isn't illegal to use the funds for other purposes. The fact is, money is cheap (because of record-low interest rates) and returns in REITs have been strong over the past 10 years.
Obviously, there is always a risk with any investment, and you could potentially lose your house with this trick if the real estate market tanks (as it did not too long ago). We said this was legal, not necessarily wise.
The Investing Answer: By using these four perfectly legal investing tricks, you can leverage the hard work, research and knowledge of the most successful investors and win big in the markets. But you can also lose your shirt (or your house) if you're not careful, so know all the risks involved before you do anything.