Are You Leveraging The Stock Market To Its Full Extent?

Sell high, buy low. That’s how you’re supposed to make money from the stock market, right? Most people only consider interacting with the stock market in this one way —waiting for the stock to go up in price. In reality, there are three different ways to make money on a stock.

In order to understand and utilize the other ways of making money off the stock market, you need to understand two concepts:

• First, whenever you own an asset that people want, there is likely an option market for it. An option is a fancy way to say an agreement to either buy or sell it. For example, if you own real estate, someone may want to buy it from you and offer you money for the right to buy it at a certain price for a certain period of time. Maybe you would sell your house for $200,000 and someone says that they would like the right to buy your house at $200,000 at any time over the next thirty days. They say they will pay you $1,000 for the option to buy your house. The longer the period, the more they will pay.
• Second, if there is a market to buy an asset, there is likely a market to sell that asset. If you know you want to buy a particular house for $200,000, you might be able to sell that person an option that obligates you to buy the house for $200,000 for a period of time. For example, you might say to the property owner, if you pay me $1,000, I will agree to buy your house for $200,000, no matter what happens in the market, during a specific six-month period. If the market drops and the house is only worth $190,000, they can make you pay $200,000 for the house. If the market stays the same, you get to keep the $1,000. If the market goes up, you get to keep the $1,000. But if the market goes down, you are obligated to pay the amount you originally agreed to.

In the stock market, the option to buy a stock is exactly like the option to buy a house at a set price. This is called a call option, and there are markets for these. The option for someone to force you to buy at a certain price is called a put option, and it is exactly like the example above in which you sold the homeowner the right to obligate you to buy the house for $200,000.

Understanding that there is more to the stock market that your traditional trading should help investors realize there are many opportunities for investment and making money. Being aware of the possibilities is what can set wealthy investors apart from the traditional investor. Of course, those who are not experienced with engaging in the option market would benefit from some expert, fiduciary financial advice.