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What are stock options and are they Right For You?

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BY VICTOR TERHEMBA

As of May 2021, the total capitalisation of the global stock market was estimated at $95 trillion, making it one of the largest entities of its type within the financial space.

While you may naturally want to invest in the stock market, however, you should know that there are a number of different investment vehicles through which you can pursue a profit.

I will explore three of the most compelling options below, while asking whether or not each one is right for you.

  1. Stock Options

I will start with stock options, which are bought directly from a market-maker (a professional buyer and seller of shares) and aren’t issued directly from the underlying company.

They are two types of options available in the marketplace; a “call” option and a “put” option.

The former affords you the right to buy shares in a particular company at a fixed price within a predetermined period of time, potentially enabling you to optimise value or capitalise on stocks that have been temporarily devalued.

As for a put option, this gives you the opportunity to sell shares in a particular company within a set period, and you’re most likely to utilise this if you expect the price of some stock to rise during this time.

  1. Stock Warrants

Next up is a stock warrant, which essentially gives a particular shareholder the fundamental right to purchase a company’s shares at a particular point of time in the future.

The price of this potential transaction will also be predetermined, with this referred to as “exercise price” and affording traders a clear insight into the value proposition on offer.

Unlike some types of stock option, warrants are issued directly by the underlying company, with the shares used to fulfil the obligation of the agreement supplied directly from a business’s ownership.

The shares are also transferred to the buyer once a warrant has been exercised, and this investment vehicle can be a great way through which to secure discounted equity at some point in the future.

  1. Stock Indices

Last, but not least, we come to stock indices or indexes, which comprise a host of individual shares from a particular country, industry or market capitalisation value. 

This unique composition of stocks provides a subsequent measure of value, which is computed and updated on a regular basis. Each individual stock boasts a different real-time price, with value changes in one not necessarily equal to the fluctuations experienced by another.

Of course, you’ll also be able to access indexes in the world of forex trading, and such entities create a greater sense of freedom for investors who can speculate on price movements (both good and bad) rather than being compelled to assume ownership of the underlying asset.

They’re also synonymous with short-term trading, as investors look to leverage different price movements to their own unique advantage.

When and if you decide to invest in stocks, it is important that you make the right choices and choose the best option suitable for you.

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