The stock market has long been an arena with the potential to give big financial returns to even the most inexperienced of investors. And though trading stocks themselves has been a more common approach of amateur investors in the past, the options market can in many ways be a far less risky way to trade. Here are some of the basics.
What are Stock Options?
Unlike common stocks (where investors effectively own shares in a chosen company), stock options instead give their owner the ability to trade in specific stocks within a given time frame. The chief benefit of options is that – unlike stocks – they do not require massive initial investment, nor are they likely to lose you significant amounts of money. As a result of this, stock options are becoming increasingly popular and accordingly, are often given as a reward to top-paid executives.
Low Risk, High Gains
Purchasing stock in a well-established company will often require you to have a significant amount of free cash before you can even think of investing. For example, purchasing 100 shares in a company whose stock price is $24 means an initial outlay of $2,400 up front; not exactly chicken feed for the amateur investor. An option contract on the other hand could potentially control 100 shares of the same stock for only $70. Admittedly, if the stock were to rise, option traders wouldn’t experience quite the same financial returns as those owning stock, but the financial risks are obviously far smaller.
Benefit from Sideways Drift
“Sideways Drift” means that the stock doesn’t go up or down. For stockholders, this is considered to be a loss over time, as their money could be reinvested in a rising stock. Fortunately, stock options holders can pull-out of an investment at the drop of the hat, meaning they are free to reinvest their money in whichever stocks they see fit. Therefore, options are in many ways a far more versatile and malleable approach.
Stock Options: A Superior Beast
It’s understandable that stocks have been a stalwart of the amateur investor for some time. After all, they’re simple and don’t require much intervention from the owner (unless of course your stock is falling beyond belief). Stock options however, with their versatility and low-risk status, are in many ways a superior beast.