Traditionally, there are two very well known forms of investing: equity and debt (with mutual funds being a collection of these). Most people are familiar and even do well at trading and investing in these 2 instruments. However, there is quite a bit of risk involved (even investing in stocks of well-established companies).
In order to make significant gains, one must take a long position or have quite a large investment. Today, I am going to introduce you to calls and puts in what is called options investing. This investment vehicle is still fairly unknown to young, independent investors like myself and usually reserved for more experienced bankers.
I hope I can convince you that options is not just for the big players and that with a little time and study, you too can profit from a great investment tool. I'm not an investment advisor, but great advice in my opinion is to use options to hedge against the risks in cryptocurrencies. I believe those who have interest in cryptos will really enjoy learning about options.
Equity Investments Explained Briefly
An equity investment is the purchase of stock in a company. For example, if you buy 1000 shares of a company at $5 / share you have just become a $5000 shareholder of a company (whoa! easy there this is still going to take a few days, it's not SBD we're talking about). Anyway, eventually you will become a shareholder by buying equity stock.
Equity investments offer tangible value for investors, and can be held as long as the buyer wants and sold quite easily to other buyers. Equity investments also pay dividends. And if the value of the company rises, in most cases so will each of your stocks.
Debt Investments Explained Briefly
A debt investment is a loan to a company or government. The company or government issues (usually) a bond that it promises to pay back at a certain point with interest. Bonds, just like stock, can be used as collateral to borrow money. Bonds also fluctuate in price like stocks based on interest rates, GDP and other economic factors.
Debt investments offer tangible value and are repayable upon a certain date. A debt is paid by companies before dividends, so bonds have first priority. However, you receive no equity interest for your bonds. As a purchaser of a debt investment, you are merely a lender and are guaranteed to receive your money back (but beware of inflation theft).
Options Investing Briefly Explained
Equity and debt investments are tangible. Equity purchase leaves a buyer with a part of a company. That buyer can do as they wish and the value follows the market. Debt purchase has a promise of repayment by a certain date.
Options investing is different and has neither a promise nor a long life span. In fact, it is not even tangible. Options also expire within a short period of time. Not knowing how to use options can actually make you take on very high level of risk. Most people when hearing this become wary and fearful of investing in options. Finally, Options investing has a complicated language and structure that takes a while to learn, so this also throws people off.
However, options provide investors with lots of ... (you got it) options. Through calls and puts, you can buy and sell to investors the option to buy or sell bunches of $100 for a certain price over a certain time period. This means that while the stock price goes up or down, you are secure most of the time to buy or sell at an agreed price, outlined in the option contract.
Options Investing as an Example
For example, imagine you wanted to buy a piece of land eventually but not right now. The owner of the land may agree to give you the right to buy in 2 years for $250,000 (not an obligation, just a right). That may be a good deal for you because you really want the house but you don't have the cash on hand at the moment. The owner of the land, of course will charge you a fee (let's say $5,000) to do this, which would be called a call option.
Let's say in 2 years, the value of the house is $1 million. The owner is obliged to sell you the house for $250,000 - you'll pay a total of $255,000 and could sell for a profit $745,000. Contrarily, if the value of the house drops to $100,000 you only lose $5000 from the option contract - you are NOT obliged to still buy at $250,000.
There is much more involved of which deserves a lot more study in order to minimize your risk. For further research, there are 4 mediums of options to learn:
- Buying call options
- Selling call options
- Buying put options
- Selling put options
Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital. Finally, I am not an investment advisor
Good Post keep it up.
Wow! you read the whole thing in 2 min - thanks