The stock market can be a very intimidating thing to consider, especially if you have no experience in investing. There are so many different terms and things you need to know, and the stakes are real. Because of this, many laypeople, especially those in the middle and lower class, shy away from investing entirely. The wealthiest, who control an outsized portion of the stock market, can often do so by paying specialists to invest for them, or already know the information because they work in a financial position. However, despite all that, there is nothing stopping anyone with a disposable income from investing. One effective way of starting out investing is by buying stock options, instead of stocks. But if you’re going to do that, it is vital that you understand what stock options are before getting into stock option trading strategies.
Stock Options
A stock option is a privilege sold from one person to another. It is essentially a contract that allows a person to either buy or sell a stock at a pre-established price. It does not, however, require that they do so. If the stock goes up in value, it can be sold at the present value, but if it goes down, it can be sold at the fixed rate. Similarly, if the option is to buy, then it can be bought at that fixed rate even if the value skyrockets. They are not indefinite, however; you cannot sit on a stock option for decades and wait for a company to accrue massive value. The basic strategies when it comes to buying stock options are known as calls and pulls.
Puts and Calls
A call option is when a party buys a contract to buy stock by a certain point in time for a specific price. Similarly, a put option is when a party buys a contract stipulating that they may sell that stock by a certain point in time for a specific price. Therefore, if someone believes that a company was going to increase in value, then they would want to buy a call option, allowing them to purchase the stock for the now discounted value. A put is a bet in the opposite direction; if someone believed that a company was soon going to decrease in value, they might buy a put, allowing them to sell the now cheap stock for more than it is actually worth. Both of these are risks, however; the value of a stock option is usually a little bit more than the present value of the stock, and if the company turns in an unexpected direction, you can end up losing out on the investment.
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