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What Are Stock Options and Their Advantages?

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Those who have ever wondered, “What are stock options?” are about to get their answer and learn about the advantages unique to this kind of investing.

There are a number of ways you can try to make money through investing. Most people know about trading stocks and probably have their money in some or at least a mutual fund. However, another method it’s important you know about is called a “stock option.”

What Are Stock Options

Stock Options
To put it simply, options are the privilege to either buy or sell a stock at a specific price within a certain period of time or on an exact date. One party sells this “option” to another investor. However, the person who purchases it is in no way obligated to buy or sell within the time period of on the date.

In options trading to buy is to call and to sell is to put. The amount it costs to buy an option is also referred to as a premium.

At the end of the day, options are all about trying to predict which way a stock will move. If you think it’s going to go up in value soon, you’d want to buy an option that would allow you to sell soon, when you believe it will happen. On the other hand, if you think the stock is going to fall, then you want an option that will let you sell (this is a lot like a short selling with stocks).

Now, let’s look at what kinds of advantages you get by trading options.

What Are Stock Options’ Advantages?

The first advantage with trading options is simply that it doesn’t cost nearly as much as trading traditional stocks. To bet on a stock increasing in price, you’d have to buy actual shares in the company and enough that any movement would produce a positive result. Usually, this will cost thousands of dollars.

With options, you pay far less. The contract is in no way a piece of the company, which is one reason it’s far more affordable. You can essentially benefit from the company’s stock going up, without having to pay nearly as much.

This makes options a great investment opportunity for beginners who may not have a lot of money to get started with.

Furthermore, many brokers will allow you to leverage your money, meaning for every $1 you invest, they’ll match. After they take their commission, you’ll still earn a lot more than if you had invested with just your own money.

As we mentioned earlier, stock options also give you the ability to make money no matter which way a stock—or the market, for that matter—is moving. This versatility has allowed option traders to continue making money even during the recession or time periods when caution reigns and the market hardly moves at all.

The next time you hear someone talking about them, hopefully you’ll no longer have to ask, “What are stock options?” but can now give some free advice. Given their many advantages, options make a lot of sense as an investment strategy.

Posted on February 22, 2015.

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