A few days ago I talked about how rumors of Macy’s (NYSE:M) takeover resurfaced, and how its investors will make nice gains if takeover takes place. On contrary, if takeover does not happen there will certainly be a drop in stock price.

Exactly that happened yesterday to Harman International Industries Inc. (NYSE:HAR) (brands include Infinity, JBL and Harman Kardon), when two equity firms backed out of their $8 billion buyout of the company. Shares of Harman dropped $27.25, or whooping 24.3 percent, to $85. Let me quickly explain why this happens. When company plans to buy another company, often shares of the company being bought go up because the buyer usually buys shares at higher than current price. On the other hand, shares of the buyer go down, because buyer must spend a lot of money to acquire another company.

Some investors use this to their advantage. For example, if the sale is considered imminent, many investors may buy shares of the company being acquired expecting the price will go up. They also sell short shares of the buyer, expecting that the price will go down.

A lot of money can be made this way, but without being very knowledgeable on the whole deal, you are gambling with your money. Just imagine how much money was lost in Harman case, because the deal was cut short.