When you own a company’s stock, you own part of the company. How much you own depends on how many shares of stock you have. Holders of common stock are the last to be paid any profits from the company but are likely to profit the most from any growth it has. Owners of preferred stock are paid a fixed dividend before owners of common stock, but the amount of the dividend doesn’t usually grow if the company grows.
A security that represents the right, but not the obligation, to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.) at a specified price within a specified time.
The single most significant difference, however, is that buying and holding stocks essentially holds you hostage to the market – you make money over the long haul if the stock goes up in price, and you lose money if the stock goes down in price. When you buy stocks, you’re at the mercy of the markets, which could cost you – big time. In fact, U.S. stocks are more expensive now than ever before.
But not options…
You can think of options as “renting” 100 shares of stock – without ever buying the shares outright.
Options offer an amazing versatility that you can use in a variety of ways to profit from a rise or fall in the underlying market. They can provide you with that same kind of safety net for your investments and trades.
Call options let you profit from rising stocks, whereas put options let you profit from falling ones – all without risking any more money than you put in at the beginning. And in times of high market volatility, options are a welcome relief from the uncertainties of traditional investing methods
Unlike stock positions, you’re not limited by market direction either. Whether the market moves up, down, or sideways, there’s always a way for you to profit using options.
And maybe best of all, simply by adding options to your portfolio, you can quickly – and easily – create a potentially unlimited stream of income.