Zero-Cost Strategy

Information

What Is a Zero-Cost Strategy?

The term zero-cost strategy refers to a trading or business decision that does not entail any expense to execute. A zero-cost strategy costs a business or individual nothing while improving operations, making processes more efficient, or serving to reduce future expenses. As a practice, a zero-cost strategy may be applied in a number of contexts to improve the performance of an asset.

KEY TAKEAWAYS

  • A zero-cost strategy is a trading or business decision that does not entail any additional expense to execute.
  • Zero-cost trading strategies can be used with a variety of assets and investment types including equities, commodities, and options.
  • A zero-cost portfolio may see an investor build a strategy based on going long stocks expected to go up in value and short stocks expected to fall in value—a long/short strategy.

How Zero-Cost Strategies Work

Employing a zero-cost strategy means there are no additional expenses to make improvements or additions to the activities of a business or other entity. As mentioned above, an individual or business can cut future expenses, as well as simplify and streamline its current processes by using zero-cost strategies.

Zero-cost trading strategies can be used with a variety of assets and investment types including equities, commodities, and options. Zero cost strategies also may involve the simultaneous purchase and sale of an asset with like costs that cancel each other out.

In investing, a zero-cost portfolio may see an investor build a strategy based on going long stocks that are expected to go up in value and short stocks that are expected to fall in value—a long/short strategy. For example, an investor may choose to borrow $1 worth of Facebook stock and sell the $1 stake in Facebook, then reinvest that money into Twitter. After a year, assuming the trade has gone as expected, the investor sells Twitter to buy back and return the stock of Facebook they borrowed. The return on this zero-cost strategy is the return on Twitter minus the return on Facebook. One important point to note is that this scenario ignores margin requirements.

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