Moneyzine
/Investment Guides /Stock Accumulators

Stock Accumulators

Moneyzine Editor
Author: 
Moneyzine Editor
4 mins
September 21st, 2023
Advertiser Disclosure

When the stock market is bullish, investors seem to take more risk. At least that's the experience with stock accumulators. These financial derivatives provide buyers with a lot of upside potential when prices are on the rise. Unfortunately, when stock prices fall, the losses can be devastating.

In this article, we're going to provide a brief overview of the stock trading strategy known as stock accumulators. As part of that overview, we'll explain why investors are intrigued by these financial derivatives, how money is made or lost, as well as the elements or structure of the contract itself.

Accumulating Stock

As the name implies, this investing strategy involves the accumulation of stock over time and was quite popular in the 2006 / 2007 timeframe. With the market decline during the Great Recession, stock accumulators were responsible for destroying a great deal of personal wealth.

The strategy behind the accumulator contract is fairly simple. On the one side of the contract is a buyer that believes a company's stock will trade within a given dollar range for the duration of the contract. On the other side of the transaction is the issuer, who believes the stock price will fall over time.

Generally, investing in a stock accumulator is considered a speculation play. Unlike stock options, these are an obligation to buy and sell shares at the strike price. The contract will outline all of the terms and conditions of the transaction.

Accumulator Contracts

As is the case with any financial derivative, the terms and conditions of the agreement will be spelled out in a contract between the buyer and issuer. Elements of the contract may include:

  • Reference Shares: this is the name of the underlying asset or security, as well as the class of the security.

  • Strike Price: also known as the exercise price, this is the price at which the issuer will sell shares to the buyer.

  • Quantity: the volume of shares to be bought and sold. This includes the quantity over the term of the contract, as well as the maximum number of shares that can be accumulated on any given day.

  • Knock-Out Price / Kick-Out Feature: this is the upper limit, or maximum price, the security can reach before the agreement is said to be "knocked out." At this point in time, all outstanding shares that have been collected are settled.

  • Dates: including the dates shares will exchange hands (settlement or accumulation), and the knock-out date, which is the first day a knock-out or a kick-out can occur.

Following the market downturn of 2008 / 2009, newer features found on these contracts may include:

  • Shorter Duration: products are now sold with durations of three to six months, down from earlier contracts of twelve months.

  • Margin Purchases: investors were often allowed to buy contracts on margin; newer contracts limit such activities, thereby protecting investors from large losses.

We're going to finish this article with two examples that should help demonstrate how stock accumulators work. In the first example, the stock will rise in price, while in the second example the stock's price will fall.

Example 1: Rising Stock Price

In this example, the buyer enters into a 6 month contract to purchase 100 shares of Company ABC each month for $100 per share. In this scenario, the stock market takes off, and so does the value of Company ABC's stock. After only four months, the stock is selling for $120 per share, and the knock-out clause is activated. The buyer has a profit of:

  • Stock Value = 400 shares at $120 per share, or $48,000

  • Purchase Price = 400 shares at $100 per share, or $40,000

  • Profit on Accumulator Contract = $48,000 - $40,000, or a gain of $8,000

Example 2: Falling Stock Price

In this second example, the buyer enters into a 6 month contract to purchase 100 shares of Company ABC each month for $100 per share. In this scenario, a bear market develops and the value of Company ABC's stock plummets. After six months, the stock is selling for $40 per share and the contract is settled. The buyer has a loss of:

  • Stock Value = 600 shares at $40 per share, or $24,000

  • Purchase Price = 600 shares at $100 per share, or $60,000

  • Loss on Accumulator Contract = $24,000 - $60,000, or a loss of $36,000


About the Author - Stock Accumulators


Explore Investing Further

Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
Looking for a way to avoid swap fees while trading forex?
Below listed are the small reviews of the top 10 ETF brokers available across the United States.
Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
The table below lists the best stock picks under $2, listed on public exchanges.
The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
This section will highlight the best EV-trading penny stocks available in the United States.
The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

How to Make a Million Dollars in 10 Years
Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
March 26th, 2024
How to Apply Maslow’s Hierarchy to Your Money This Year
You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
March 27th, 2024
How to Tackle Multiple Savings Goals
When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
March 22nd, 2024
The Countdown to Early Retirement: 10 Expenses to Eliminate
Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
March 22nd, 2024
Biden Or Trump: Who Is Better For The Economy And Stocks?
Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
March 19th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.