New To The Stock Market? Looking For A Good Place To Start?
You can't pick up the business section of a newspaper without being inundated by the stock market buzz. Shares are up, it's a bullish market! Shares are down, it's a bearish market! Do you read these things and then think to yourself, What do bears and bulls have to do with trading stocks and what the heck is an option? If the thought of investing intrigues you, but you're hesitant because you are just now beginning to educate yourself about the investment world, then you will find this article very helpful. I've attempted to define some of the basic, lower-risk stock trading strategies for you.
What is a stock anyway?
Think of stock as assets that you own in a company. When you purchase a stock, you are given a certificate that tells you how much of that company you own. Each stock that you buy in a company represents an actual percentage of that company that you own. The benefit of owning stock in a company is that when that company benefits, you benefit as well. On the flip side, if a company begins to decline so does your stock. This is where a little research up front will go a long way towards your investment success.
What is a stock option?
When you buy a stock option, you are buying the right or privilege to buy or sell a particular stock withing a specific time frame at an agreed-upon price. People like stock options because they are safer. There is less risk involved because you put less money up front. There are two main ways that you purchase stock options:
Call Options
Okay, lets say that IBM stock is selling in the marketplace for $90.00 per share. According to your research, you believe that within a year that stock price will raise significantly. So you purchase a one year call contract on 100 option shares at $2.00 per share plus a fee with the agreed-upon price of $100.00 per share. So now, you have the right, but not obligation, to buy those 100 shares at $100.00 anytime within that one year period. So, let's say that 10 months down the road, IBM's market value is now $120.00. You can then buy those promised shares at the pre-agreed price of $100.00 and sell them at their market value of $120.00, or you can sell your options to someone else. You benefit financially on Call options when you believe a specific stock is going to increase in value.
Put Options
Let's use that same IBM Example. Let's say that its stock has a market value of $90.00 per share. You believe that IBM stock is going to significantly plummet within the year. So, you purchase a put option that allows you the right, but not the obligation to sell your promised shares at $100.00 per share at anytime within the contract period. So, let's say that 9 months later, IBM stock has plummeted to $70.00 per share. You then have the ability to sell the options you purchased at $100.00 per share to someone else. You only benefit from buying Put Options if you believe the stock value will go down during your contracted time.
The Bottom Line
In the end, if you are new to the world of stock trading, then options can be a nice way to go. They can be a nice option while you're learning. That way if you make any major mistakes, you have less up front capital to lose. I would suggest that you find a good stock broker that has a good reputation to help guide you towards smart investment. I hope this article helped. Good luck!
Alan King is a writer that concentrates on helping people better themselves, for cutting edge information you NEED to know about stock trading before you try to cash in on this multi change your life I strongly suggest that you check out my friend Alan Crisp's awesome free 9 page e-book at http://www.stressfreetrading.com