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You may have been told in the past that trading in options is a risky business. You can lose your shirt over night, some times even quicker. How do you know which is the truth? I want to take a few minutes and look at stock ownership. What are the possibilities when you buy stock? Stock can go up in value The stock price goes down. Its value can go sideways. In the first case, you can make money. In the second you lose money. And in the third case you don't directly win or lose but in fact it costs you money in two ways. The direct cost of brokerage and fees. And the indirect cost known as opportunity cost. Opportunity costs result due to your inability to invest in other opportunities hence the loss of the opportunity to make additional profit. As you can see if you buy stock the only way to make money is for the stock price to go up. OK, the next possibility is short selling stock. Shorting is a method to consider but it comes with a high risk which leads us not to recommend this option. Shorting stock requires you to sell stock you do not own with the intention to purchase it back at a value less than you paid. It's the difference in value that makes you the profit. But can you see what the problem is here? The risk is the value of the stock going up; especially if it goes up a lot! As you have sold the stock at a lower price you now have to buy it back at a higher price. And so your loss can be substantial. So just to clarify, when trading in stock you only make money when the price increases. Now there is one other aspect to this that I want to address. And this is that owning stock is expensive! If you purchase 100 shares of a $50 stock it will cost you $5000. And if you buy it on margin it is still $2500. That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction. Plus as stocks don't trend all that often you not only need to pick the right direction, you also need to be able to pick the right time. So stock trading is not that easy. And it's expensive. A good alternative is buying options. To start with you have less of an initial investment. You can invest about 2% of the stocks value but still have the control over the stock. Taking the example above that's investing $100 instead of $5000. Plus, if you select the right strategy, you can profit no matter whether the stock price goes up; goes down or even goes sideways! And finally, your risk is limited. The maximum you can lose is the amount you put into the trade. So in the example above - $100. You should also consider the leverage that options give you. Once again taking the above example, to get an increase of around $5 would result in a 10% profit or 20% on a margin. But with a similar increase in prices the value of your option may increase by 100%. This would give you a profit of 100% - this is ten times more profit than on the standard stock trade. In conclusion don't limit your options by accepting the standard view that stock ownership is the safe way to go and trading in options is the high risk game. By understanding options and the ways to trade them you can see good returns on your investment. We offer the information in this article for educational purposes only. It is not to be used nor is it provided as financial advice. It is provided based on our own experiences of what has worked for us personally. If you are planning to trade or invest in the stock market you should seek advice from a registered licensed advisor. Article Source: http://www.articlewheel.com
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