Learning Options Trading: Investment Basics to Know

There’s a reason why astute investors make stocks a major part of their investment portfolio. Over time, stocks will generally outperform anything other than real estate. As you contemplate building your own investment portfolio for retirement or growth value, it would be a good idea for you to allocate a good portion of your investment resources into the stock market.

Buying Stock

When you purchase stock, it’s traditional for you to purchase stock in increments of 100 shares at a time. There are two reasons for this. First, it’s easier to calculate the value of 100 shares of stock. You would simply take the current stock price, add two zeroes and arrive at the value of 100 shares. The other reason involves a purchase pricing issue. If you choose to buy an “odd lot” of shares, there will be a small premium added to the price per share.

Types of Stocks

There are literally a dozen different types of stocks you could purchase. To keep things simple, this discussion will focus solely on common and preferred stock.

While both common and preferred stock represents ownership in an underlying company, each type of stock comes with different ownership rights. Common stockholders have voting rights they can exercise to help the corporation make important hiring and business decisions. Preferred stockholders have no such rights. On the preferred stockholder side of the ledger, dividends are paid per share. If the underlying company declares a general dividend, the preferred stockholders get preference before common stockholders get a share of the pie.

About Options Trading

If you are interested in getting involved in the stock market, there are alternatives to stock trading. For traders who might have little cash but a higher risk tolerance, options trading might be the perfect investment alternative.

Do Enjoy Reading  What Does GME Saga Teach Us When It Comes To Stock Trading?

Generally, options are available for a majority of what stakeholders would consider the most prominent securities. An option represents the right to buy (call option) or sell (put option) 100 shares of the underlying stock. The option comes with a strike price (the price at which the stock must be bought or sold) by a specific time in the future (expiration date = third Friday of each month). The options market provides access to monthly options out as far out as one year per underlying security. Additionally, the market will provide access to a decent range of strike prices for each underlying security.

Options can be bought or sold without involvement in the underlying stock. The investor simply makes an option transaction in anticipation of the stock going up or down within a specified time period. For all intents, investment experts consider this type of investing to be speculative. This may be a good investment option for investors who don’t have sufficient capital to purchase underlying stocks.

Options can also be used in specific investment strategies designed to create addition income while owning the underlying security. While there are numerous such strategies available, experts would consider writing calls and puts to be the easiest strategies to implement.

Options Trading for Beginners

Admittedly, options trading can get complicated. However, the following is a quick crash course (options trading for beginners) on how to buy calls and puts. The best way to relay this information to you would be by example.

McDonald’s Corporation’s (symbol: MCD) current common stock price sits at $200 a share. Assuming you cannot afford 100 shares of MCD at total price of $20,000 maybe you could afford to buy 1 call. Remember, a call option purchase is essentially a wager MCD will increase in price. You decide to buy 1 MCD call with a strike price of $205 and an expiration date on November 15, 2019. The call will likely cost around $3 a share or $300 for the option. If MCD never rises above $205 before expiration date, you could lose the entire $300. You also have the option of selling the option prior to expiration for a small portion of the original purchase price. If MCD exceeds $205 by expiration, you might be able to sell the option for a profit or ultimately get the opportunity to buy the stock at the strike price of $205 or $20,500.

Do Enjoy Reading  Maximizing Your Tax Season: The Pros & Cons of Tax Refund Loans

Puts work in a similar fashion, though the expectation is the stock price will head down. If you were to exercise a put, you would be agreeing to sell the put at the strike price. This might necessitate you going into the open market and buying 100 shares before you can sell the 100 share.

You may also like: Best Virtual Trading Platforms in India

If you have an interest in options trading, you should read more information or seek professional investment advice about it.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.