“When buying shares, ask yourself, would you buy the whole company?" -Rene Rivkin
Stock and stock options are terms which are commonly used interchangeably. However, they are two completely different types of investments. The term stock refers a piece of the company purchased by an investor with a small investment.
A stock option is an investment which allows you the ability to buy company stock and then sell it at a set price in a set amount of time. When dealing with stock options there is always a buyer and always seller. As an investor sells stock options, he creating security for the company and the investor. Trading or investing in stocks is often referred to as gambling. Many people believe success in the stock market is based just as much on luck as on solid research.
The value of a stock options is referred to as a premium. The investor that is purchasing the stock option does not risk more then the original value of the stock option. Even if the market goes up or down the premium on the stock option remains the same. If the market increases this is great for the investors, but bad for the options sellers.
This is why stock options offer unrestrictive profits. It is really the seller of the option that shoulders all the risk. If the seller is unable to find an investor to buy the options then he must shoulder the cost of those options, himself. While the investor can only lose the original investment the sellers’ lose can be far greater.
There are two types of stock options. They are American stock options and European stock options. American options can be bought and sold during any time between when the seller purchased the options and the termination date. However, European options can only be bought and sold on the date of the expiration.
Most casual investors will only trade stocks and not stock options. Trading stock options requires a great deal more knowledge and money upfront. In addition, stock options carry a great deal more risk then stock trading and should not be attempted by investors who have small or even moderately sized capital to invest. Selling options is usually part of a larger financial plan that was established by the seller. Stock option trading needs to be balanced by low risk investments which have a stable rate of return.
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