Introduction To Options Trading, Part 1

Stocks provide you with tangible value, because they represent part ownership in the company. If the stock rises in value, you will gain a profit. Stocks, because they have tangible value, can be traded over public exchanges, or they can be used as collateral to borrow money.

The study of options can expand your perceptions about the range of possibilities. Most people are familiar with two forms of investment: equity and debt.

The best-known example of this is the purchase of stock in publicly listed companies, whose shares are sold through the stock exchanges. Each share of stock represents a portion of the total capital, or ownership, in the company.

Example

When you own a bond, you also own a tangible value, not in stock but in a contractual right with the lender. Like stocks, bonds can be used as collateral to borrow money. In the event an issuer goes broke, bondholders are usually repaid before stockholders as part of their contract, so bonds have that advantage over stocks.

Equity for Cash: You purchase 100 shares at $27 per share, and place $2,700 plus trading fees into your account. You receive notice that the purchase has been completed. This is an equity investment, and you are a stockholder in the corporation.

Example

Lending Your Money: You purchase a bond currently valued at $9,700 from the U.S. government. You invest your funds in the same manner as a stockholder, you have become a bondholder; this does not provide any equity interest to you. You are a lender and you own a debt instrument.

Equity and debt contain a tangible value that we can visualize and grasp. Stock ownership lasts as long as you continue to own the stock and can not be canceled unless the company goes broke; a bond has a contractual repayment schedule and ending date. There is no tangible value at all.

These attributes– lack of tangible value, worthlessness in the short term, and decline in value itself– make options seem far too risky for most people. Not all methods of investing in options are as risky as they might seem; some are quite conservative, because the features just mentioned can work to your advantage. In whatever way you might use options, the many strategies that can be applied make options one of the more interesting avenues for investors.

We’re talking about investing money in something with no tangible value, that will absolutely be worthless within a few months. To make this even more perplexing, imagine that the value of this intangible is certain to decline just because time passes by. To confuse the point even further, imagine that these attributes can be a disadvantage or an advantage, depending on how you decide to use these products.

Tip

When you own a bond, you also own a tangible value, not in stock but in a contractual right with the lender. Stock ownership lasts as long as you continue to own the stock and can not be canceled unless the company goes broke; a bond has a contractual repayment schedule and ending date.

The best-known example of this is the purchase of stock in publicly listed companies, whose shares are sold through the stock exchanges. Stocks provide you with tangible value, because they represent part ownership in the company. Stocks, because they have tangible value, can be traded over public exchanges, or they can be used as collateral to borrow money.

Option strategies range from high-risk to extremely conservative. The risk features on one end of the spectrum work to your advantage on the other. Options provide you with a rich variety of choices.
Trading Foreign Exchange, Commodity Futures, Options and other Over-the-Counter Products on Margin Carries a High level of Risk and May Not Be Suitable For All Investors.

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