07/29/2016
Advice of the day:
The economy doesn't have to be doing well in order to make money from the stock market. One can actually make money from companies that are doing bad financially. There are so many investment tools out there that the average investor is unaware of. Two most common tools available used are called options(put and call) and shorting.
First is put options:
A put option is a contract that gives the buyer of that contract a right to sell an asset in the future no matter what the price may be for a cost within a time frame. For example, I believe a company is overvalued and will come down in price soon. Currently, Google stock is worth $800 per share. I believe it will go down in price so I buy a put option contract with a target price of $750 that cost me $5 per share(cost will vary depending on length and target price). Each contract covers 100 shares so it cost me $500. Say within a month Google drops to $750. You can exercise your contract because it is "in the money" and lower than the initial $800 price. You are now +$50 per share multiply 100 shares in the contract which equals $5,000 minus cost of $500. That is a profit of $4,500!
Next is call options:
Call options are usually bought when one believes an asset will go up in the future but I will cover this topic just because its the other side of the option. A call option is a contract that gives the buyer of that contract the right to buy an asset in the future no matter what the price may be for a cost with a time frame. For example, I believe a stock is undervalued and will rise in the future. Google is currently worth $800 and I believe it will go higher. I will buy a call option with a target price of $800 which cost me $5 per share(cost varies depending on length and target price) multiply 100 shares in the contract which equals $500. Say the stock rises to $850, your contract is "in the money" and you may want to exercise your option. So you are up +$50 per share multiply 100 shares which equals $5,000 minus cost of the contract of $500. That is a profit of $4,500!
Options are attractive investment tools because you are able to make good sized profits from a small capital investment.
Next is the topic of shorting:
Shorting a stock means you borrow shares from someone(usually a broker or a big investment company) in order to sell today to make a profit. For example, I borrow 100 shares of Google and they are currently worth $800 per share. I sold them right away and now have $80,000 in my account. It cost me 0.2% to borrow so it costs $800*100 shares which equals $80,000*0.2%= $160 per day. Say the Google shares went to $700 in 28 days, you may want to close you position and pay back the shares you borrowed. It would cost $700*100 shares which equals $70,000 to buy back the Apple shares. You just made $10,000 minus cost of borrowing for 28 days(28*160=$4,480) which equals $5,520!
Warning! Use at your own caution. Shorting is not without risks. If the Google stock goes up to $900 then you would have to pay $90,000 plus $4,480 so you are out $14,480 for you gamble when you close! Options have less risk because you can just let you contract expire without further costs. Shorting is more risky because the rewards can be bigger but the capital loss can increase over time. Also, short contracts dont usually expire under normal circumstances unless you choose to end the contract.
Investing is not easy and can get very complicated. Only savy investors that understand how the market works are the ones that are able to make the most money. Contact a financial professional if you are seeking guidance on how to use these investment tools effectively.
Thank you for reading!
