• Characteristics of Various Types of Securities
• The Ins and Outs of Income Trusts
• The Prospectus – Being Informed
• Understanding Mutual Fund Fees
• Stock Options
• Offshore Investments Sold Through Internet Can Wash Your Savings Away

Besides investing directly into stocks and bonds, more experienced or sophisticated investors may use stock options to try to turn a profit on the stock market.

If you believe the value of a certain stock will rise and you want to take advantage of this without investing directly in the stock, then you could buy a call option and become an option holder. You do this by paying a “premium” to the option writer who is the person who sells the option.

A call option gives you, as the option holder, the right, but not the obligation, to buy a stock at a certain price. When you buy a call option, an expiry date comes with it. If the stock rises as you had hoped before the expiry date, then there are two ways to profit from the rise in the stock. The first is to sell the option for a higher price than you paid for it. The second is to “exercise” the option, which involves formally buying the stock and then selling it at the prevailing market price. This is referred to as ‘exercising’ the option.

If you do not exercise or sell your call options by the date the option expires, it becomes worthless and you lose the price you paid for the options. If you believe that the value of a stock will fall and want the option to sell a stock at a certain price, you would buy what is known as a put option and then sell the stock at the higher price.

Options don’t pay dividends or interest. Returns depend mainly on changes in the market value of the underlying asset (the stock it is linked to buying or selling), although there are other factors that affect the price of options, especially the amount of time left until the option expires.

Options are usually traded on an exchange separately from the stocks they are linked to. It is possible to use options for a number of purposes. First, one can speculate by using an option to take a position about which way a market will go. This may be through an option based on an individual stock or an option based on an index. The second is to hedge, or to protect yourself, against potential movements in the market that would lead to erosion in the value of your investment.

If you buy an option, your loss is limited only to the premium, but if you sell (“write”) an option your loss can, in theory, be unlimited. Options are quite technical. They can be complicated and need to be watched and traded carefully.