How To Use A Stock Option On Any Business

Wall Street has always been a place of innovation, and that is something that will likely never change. As such, it can be expected that the people who work on Wall Street will be able to release new and interesting ways that individuals can invest their money. One of the most interesting is buying or selling something known as a stock option.

What Is A Stock Option?

 

In simple terms, this is a contract that one makes with their broker. Through the contract, the investor is purchasing the right, but not the obligation, to buy or sell a particular stock (piece of a company) at a certain price in the future. It sounds complicated, but that is just about the simplest way of explaining it. In order to put a stock option on a company yourself, you are going to have to use a stock broker to make it happen. You select the option that you would like based on when you believe the stock will increase or decrease and how much you think it will. For example, you might select a $10 strike price Nov call option on a stock that is trading at $9 per share in June. If you are correct in guessing that the stock will be above the $10 price by November, then you are going to make some money for yourself. This is just one example of how an option might work. For a more in depth one might look at the investopedia.com article titled “Options Basics: How Options Work“. This article lays out a scenario that can show you step by step how a particular potential stock option trade might work.

How Do I Invest In This?

 

Investing in a contract such as this is simple enough. You just need to get a broker just like the ones that you would get for purchasing stocks or bonds. Most all brokers who deal in stocks and bonds are also going to deal in options. As a small investor, you may want to explore an online broker such as ING Sharebuilder, Etrade Financial, Scottrade, or one of the many others. In most instances, these brokers are able to provide much cheaper commissions than brick and store brokers. Just find the ticker symbol of the company whose options you would like to purchase, and enter that information into your account. Within seconds, you will be the owner of contracts for options on a company’s stock.

Why Is This A Good Investment?

 

Diversification is a great reason to look into putting some of your money into a company in this unusual way, but that is actually not the prime reason in this case. Rather, you want to try to make massive profits off of small amounts of money. Buying contracts for a company’s stock is much cheaper than purchasing the stock itself. You are taking a much larger risk when you purchase the contract rather than the stock, but your reward scale goes through the roof as well. If you are able to correctly predict the stock movement, you will be rewarded in much greater amounts than you would if you just invested in the stock. Doubling your money in this type of investment in a short period of time is common. At very least, you will be keeping some excitement in your portfolio that keeps you interested in investing. All investors should give options a shot at least once in their investing career.