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We prefer to trade in options rather than stock.

While many will tell you that options are high risk; even tell you horror stories about people losing everything trading in stock options.

How do you know which is the truth?

I want to take a few minutes and look at stock ownership. What are the possibilities when you buy stock?

The stock price goes up.

The price can go down.

Its value can go sideways.

If the value goes up you make money. If it goes down you lose money.

However if there is sideways movement you will not directly gain or lose money. You will however incur costs through brokerage fees directly and indirectly lose money through what is know as "opportunity cost."

This is the cost due to lost opportunities. The fact that you aren't able to be involved in other, potentially profitable trades.

So if you purchase stock you can only make money if the stock price goes up.

At this point you may say what about shorting stock?

Shorting is a method to consider but it comes with a high risk which leads us not to recommend this option.

To explain - when shorting stock you are selling stock you actually don't own. Your plan here is to sell high and buy back low. The difference in price is what makes up your profit.

But can you see what the problem is here?

Can you see what would happen if the stock price went up? Also what would happen if it when up a lot?

As you have sold the stock at a lower price you now have to buy it back at a higher price. And so your loss can be substantial.

Once again you can only make money when trading in stock if the value increases.

Now there is one other aspect to this that I want to address. And this is that owning stock is expensive!

If you purchase 100 shares of a $50 stock it will cost you $5000. And if you buy it on margin it is still $2500.

That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction.

Plus as stocks don't trend all that often you not only need to pick the right direction, you also need to be able to pick the right time.

So stock trading is not that easy. And it's expensive.

But options provide a great alternative.

For a start you only have to invest about 2% of what the stock was worth and yet you still control the same 100 shares.

Based on the previous example your investment would be around $100 instead of $5000.

It also gives you more alternatives and with the right choices you can profit what ever way the stock values move.

In addition to this you are reducing your risk. The most you can lose is your initial investment of $100.

A major advantage of options is the leverage they provide.

In the above example, if the stock price goes up by $5, the profit on the stock trade would be 10% or on margin, 20%.

However with a similar increase in value an option could increase by about 100%. Your profit would be 100% on the option which is 10 times more than on a straight stock trade.

In conclusion don't limit your options by accepting the standard view that stock ownership is the safe way to go and trading in options is the high risk game. By understanding options and the ways to trade them you can see good returns on your investment.

The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.

This Stock Market article is provided by Articleteller - The Free Article Directory http://www.articleteller.com

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