For the uninitiated, reading the business section in a newspaper or reading business magazines can often be a bit mystifying. On one hand, everyone knows about stock trading in a very basic way and all the talk about bulls and bears can be confusing, even in light of the fact that a bullish market means share values are up while a bearish market indicates sluggishness or lower share values. The end result is that a simple and straightforward exercise of investing in the stock market appears to be complicated and full of strange notions that seem to make no sense.
The “stock" in stock market is basically a representation of the assets of a company. When you own stock you basically own the equivalent share in the company. Buying stock is equivalent to buying part-ownership of the company. The whole point of buying stock is that when the company makes a profit then you, as a stock holder, receive a percentage of the profits equivalent to your share in the company. The downside is that when a company goes into loss the stock value goes down.
Buying stock option gets you the right to buy or sell the stocks of the company within the time allocated to that option. Stock options are considered a lot safer by investors as you require much lower capital. You can make money real quick using stock options but there are still some risks of losing money equally fast if not faster.
The process of buying stock options is known as “Call". Here is an example of the Call operation. Assume that a certain stock is selling for $90.00 per share. Your research informs you that after a period of one year, this stock will have appreciated by a significant amount. You will then purchase a 1-year contract for 100 stock options at $1.00 per share and the contract includes your estimated price of $100.00 per share. This gives you the right, without any obligation, to buy that many number of shares when the price hits $100.00 After 10 months, you discover that the price of the stock is at $120.00 per share. You can now purchase those stock options at the agreed price of $100.00 and immediately sell them off at $120.00. The extra $20 per share nets you the profit as per the number of options you included in the contract. Call makes a profit when share values go up.
Following the above example, assume that your researches tell you the price is going to fall significantly after one year. This time, when you enter the contract, you get the right, but are not obliged to, sell your stock options within 1 year at the agreed price of $100.00. If, after 10-11 months the price is around $80.00, then you can sell your options at the contractual price of $100.00 and the $20.00 per share is the profit you make. Put makes a profit when share values fall.
There are many strategies to trading itself but all trading comes down to Put and Call.
Alan King is a writer that concentrates on helping people better themselves, for cutting edge information you NEED to know about stock trading before you try to cash in on this multi TRILLION dollar industry I strongly suggest that you check out my friend Mark Crisp's awesome free 9 page ebook at http://www.stressfreetrading.com