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Know These Options Before Investing in the Stock Market

Options Overview

Investing in the stock market is a risky venture, as the stock market may fluctuate a great deal on a regular basis. Factors such as the condition of the economy, success of a corporation, and subjective value of a stock will have an effect on the cost of shares of stock. If the fluctuation of the market is substantial, it is possible for shareholders to lose a notable portion of their investment. In order to protect their investments, many stockholders choose to purchase derivatives.

Call Options

One of the most commonly purchased type of stock options are call options. When an individual purchases a call option, he/she obtains permission to buy a certain share of stock for a specified value. For example, a buyer may be permitted to buy 100 shares of stock for $20 per share. A call option will specify the contract's expiration date, and the buyer must redeem the terms of the agreement by this date lest it become invalid. The date may be set a few months or a few years from the date of purchase.

Call options are beneficial because they protect investors from fluctuation. If the value of a stock increases, an option holder will be permitted to purchase the stock for the strike price that was agreed upon. This may allow an individual to earn a significant profit. However, if the share value decreases, then the call option will not be of any use to the buyer, and he/she will lose the premium that he/she paid to obtain the call option.

Put Options

Like a call option, a put option is a derivative intended to protect option traders against market fluctuation. Many investors that are comfortable trading call options are unfamiliar with the techniques of trading put options. However, adding a put option to an investment portfolio may be beneficial for an individual and help him/her to earn a profit. When an individual buys a put option, he/she is purchasing the right to sell a designated share of stock at a specified price. If the value of a stock decreases below the strike price, the options holder will be permitted to continue selling the stock for the agreed upon price.

The options holder will then be selling shares of a stock for more than the market value. However, if the value of the stock increases, the put option will be of no value to the buyer, and he/she will lose the investment that was dedicated to obtaining this derivative.

NEXT: Need to Know Facts About Options Background

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