When it comes to investing money, many people first think about the stock market. This is an auction-like marketplace where investors buy and sell shares of stock. Each stock represents a small piece of ownership in a public corporation. The price of a particular stock will vary depending on what the investors’ opinions are about what the company’s earnings will be in the future.
What Is Options Trading?
Stocks are not the only thing that can be bought or sold on the stock market. Options are another form of investing that is particularly helpful for beginners. An option is defined as a type of contract that is bought or sold. This contract gives the buyer of it the right to sell or buy a stock at a specific price anytime before or on a particular date.
To help clarify a little more, options are basically contracts that you can buy or sell on the stock market. The whole idea behind an options contract is based on predicting how a stock will move in the future. If you know that a particular public company is getting ready to release a new product that will change how people do business, then you’ll likely conclude the stock price will go up.
In this case, you’ll want to purchase an options contract where you can buy the stocks at a price that is lower than the value of the stock in the future. For example, let’s say you buy an options contract that gives you the ability to buy 100 shares of stock XYZ at $4.00 for the next 30 days. After the new product release, the stock price skyrockets to $8.00.
As long as this happens before your options contract expiration, you can exercise your options agreement. You’ll buy 100 shares of stock XYZ at the $4.00 price point and can immediately resell them on the stock market for the going value of $8.00 per share. You’ll end up doubling your money with just this one options contract.
How Are Options Sold?
As a newbie to the investment market, you can get into options trading very easily. You’ll be given the option in a specific format that you’ll need to understand. Let’s break this down in our complete guide to options trading, so you have a better idea of how to buy these options on the marketplace.
Call Vs. Put
When dealing with options trading, you’ll need to understand the difference between a call and a put. A call is the ability to purchase a companies stock in the future. A put is the ability to sell a stock in the future. When evaluating options contracts, you’ll see these two terms used to determine what action you’re buying the right to exercise.
When To Get A Call Option
A call is best used in cases where you believe the value of the stock will rise soon. This could mean a company that is releasing a new product or a development firm that just bought up a new section of town. When you think that the stock price is going to rise, you want to purchase an option agreement that allows you to purchase stock in the future at the same price it’s at today. This way, you can resell the stock in the future for more money than you paid for it.
When To Get A Put Option
A put is best used in cases where you think the value of a stock is going to plummet. This could mean a scandal is released about a top executive, or there are rumors about the company going bankrupt. A put will give you the option to sell the stock price in the future for a specified amount. Once the stock price plummets, you’ll essentially buy the stocks at a low price and resell them by exercising your options agreement at a higher than market value price.
Now that you have the basics about how options trading can be added to your investment strategy, there are many ways that options can allow you to invest with a smaller risk than buying traditional stocks in a company.