Last week in the Bullhunter blog, we discussed the topic of mutual funds, but investing isn’t just about making money. Every good investor knows that it’s about preparing for the future and about having a safety net in place in case things don’t go our way. In order to make the most of this safety net, it pays to know about many different types of investment opportunities that are available.
While most are usually overlooked as being too complex or dangerous, we’re here to dispel those notions and inform the amateur investing community about opportunities that they might be missing out on.
Defining Stock Options
This time, we’re actually going to be discussing something directly related to the stock market: Stock Options. Previously in this blog, we discussed quite a bit about all the various options that are available to investors. Nonetheless, the topic is still worth mentioning in this context. Simply put, stock options are when you buy or sell the right to buy or sell a stock at a specified future date.
Types of Options
Why would anyone do this? It’s usually the result of differing predictions about future market behavior. When you purchase a call option, you then have the right to buy a stock from the seller at a certain price at a certain time. If the value of the stock rises above that price, then you come off well, because you can then buy that commodity for significantly less than market price.
When you purchase a put option, it gives you the right to sell an asset for a certain price at a certain time. If the price of the stock in question falls lower than your put price, you profit because you’re able to sell for more than market value.
As you can see, stock options are kind of risky. However, for those who enjoy the predictive aspects of stock market investing, they are a great way to maximize your profits while at the same time reducing some of the risk of raw investing.
See you next week for part 13 of Investments.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 2 comments… read them below or add one }
Hi Sean,
You’re right; stock options do seem risky. I don’t think this is a strategy for me straight up. I think you’d have to be pretty good at knowing what the market was going to do.
Obviously there are things you can do that will give you an indication of which way a certain stock is going to go. But, nothing is for certain.
Hi Jazz
All trading carries a risk. The idea is to minimise the risk and maximise the profit.
You learn to look for certain indicators as part of your trading plan and make sure that you can tick these off before you put a trade on.
You are getting the idea now Jazz.