Stock Option Investing
Stock option investing can be the most rewarding or punishing of choices a person can have in a portfolio. Investments such as these give an investor one of two choices: speculate that an investment will go up or down, or hedge against a predicted fall in value. An option is just like a stock or bond and is considered to also be a security. Option trading and investing is a contract with very limited terms, and is not for the faint of heart and neither is it for the beginning investor. It can be quite complicated at times and is best left to the more experienced trader.
Stock option investing means that a person has a right, but not an obligation to buy or sell. Let's imagine a customer who has found the most beautiful motorcycle ever seen. In just six months, the customer will be promoted to the VP of media relations for a well known company, replacing a gentleman who is retiring. The salary will double and at that time, the customer will have the money to buy this incredible machine. So a deal is struck with the owner to buy the motorcycle which costs fifty five thousand dollars. In six months the bike owner agrees to sell the machine for fifty nine thousand dollars, because the option to buy costs four thousand dollars alone.
Two things can happen during a six month period. During an inspection of the bike by a national biking magazine writer, it is discovered that this bike is actually one of only three ever made, and suddenly the bike is now recognized to be worth $120,000. The owner of the bike must still sell it to the customer for fifty nine thousand dollars because of the option to buy that was purchased for four thousand dollars. On the other hand, if it was discovered that the bike has been in a wreck and some of the parts on it weren't original, the value of the bike drops to forty thousand. The customer could pass on the purchase but would lose four thousand dollars. This is a highly simplified example of how stock option investing takes place. "The crown of the wise is their riches: but the foolishness of fools is folly" (Proverbs 14:24).
The money in stock option investing is made in when an investor guesses correctly if a the investment will go up or down by a particular date. Stocks are bought and sold in bundles of one hundred, never less or more. A call is the right to buy a bundle, and a put is the right to sell a bundle of one hundred. There is always an expiration date when dealing with options. The expiration date may span from less than one month up to three years. The agreement to buy or sell a stock is based on what is called the strike price and the further a stock moves beyond the strike price, the more valuable the option becomes. At the same time, when an investment moves lower than the strike price, the more valuable the right to sell becomes. In actuality, money in stock option investing can be made regardless of the direction in which the market moves.
Learning all the intricacies of stock option investing is a long term process. Often called derivatives, option transactions can be very complicated. Large amounts of money can be made and lost in a very short period of time. One expert in this business suggested that a person buy every book available on stock and read them all until understood both backwards and forwards. Because of the great risk factor and also the great reward factor in investing and trading derivatives, the advisable course of action would be to seek some formal training in the business before ever indulging. Courses can be found both online and at local universities and community colleges.
Certainly seeking the sage advice of those professionals who actively trade in derivatives would also be a wise move. Spend time with these people and pick their brains for as much information as possible. This is time well spent for someone serious about making and keeping the money that is to be made in stock option investing. Discover how to recognize a good investment, when to sell and when to buy. Investing is not for the faint of heart, but for those who can withstand seeing some losses every now and then. This goes with the territory. However, there are investments termed as securitized derivatives, which guarantees a return on the money for investments purchased. Other types of derivatives besides stocks are T-bills which are issues by governments, commercial paper, issued by companies and bonds, also issued by governments. Some investors enjoy buying and selling foreign currency. The gains or losses are realized relative to the U.S. dollar.
A person interested in stock option investing can also put money into what are called commodities, which are items such as orange juice, corn, tea, etc. Ever since some new companies began using corn to create fuel, corn has seen an increase in price. Consequently, because corn is fed to beef and now may be in short supply, investors may also realize that beef will now rise in price as well. In this manner, a wise investor will understand other avenues that will yield better returns. A thorough study of the types of investments available will most likely provide the kind of knowledge to enable a person to make very wise investment choices without having to worry about losing a lot of money. The homework will usually pay off whether investing in stock or derivatives.
Stock Option InvestmentFor a worker, a stock option investment may be a way to invest for retirement or to build wealth. Many firms offer stock option investing for their employees. This means that the employer gives the employees the right to buy a specific number of shares in the company during a time and price that he specifies. Both privately and publicly held companies can offer this advantage. Usually, the investments are offered to attract and keep good workers, to make employees feel like they have a part in the business, and to give skilled workers compensation beyond a salary. This is often true of start-up companies that cannot compete with more established firms in hiring skilled workers.
The price the company sets on the stock is called the grant or strike price, and it is less than the price offered to the public at large. The stipulation is that the stock cannot be sold for a certain period of time, called the vesting period. This vesting period may be for three to ten years. The employee takes up the offer because the worker thinks that in that time period, the price of the shares will go up. Then when the buyer goes to sell them, he will make a profit. The disadvantage is if the company goes out of business or doesn't do well, the employee will lose money when his shares are sold. In taking stock option investment, the employee has several options. He can wait until the vesting period is over and sell his shares, or go through the vesting period, sell some of his shares, and keep some to sell later. A third option after the vesting period is to change all the options to stocks, but at the discounted price, and keep them all with the idea of selling later when each share is worth substantially more.
Financial options are contracts between two parties with the terms specified in a term sheet. The holders right to buy is called a call option, and the right to sell is called the put option. The employer will usually limit the number of shares that workers can buy at the discounted price. Of course, the worker could buy any number of shares at the regular price through the normal investing avenues. Usually, stock option investing plans have expiration dates, meaning that the worker can exercise options starting on a certain date and ending on a certain date, often within one year. If the worker doesn't exercise the options, he loses them. If the worker quits the job, he can keep vested options, but cannot buy more. Small, closely held companies sometimes do not want to go public, so they may find it difficult to create a market for shares in the firm. If the company doesn't have a broad-base with which to sell market shares, this plan may not work well for the employee.
One important question to ask when agreeing to this benefit is how the company fixes the price on its stocks. Most firms settle on a price through the company's board of directors through a vote. Therefore, before deciding on stock option investing, the market value of the company's stocks should be researched to find out if the deal offered will be profitable or if the discounted price of the shares is too high. For some firms that are new to the market, this price may be hard to determine. This investment accompanies some risk since the investor is not guaranteed that his shares will go up in value during the vestment period. If the company sees a set back or goes bankrupt, the employee will suffer the loss. A good example of this is what happened to Enron employees who bought huge amounts of their company's stock, and many lost their entire retirement when Enron folded. In the past, companies used stock option investment to reward top management and key employees so that these people would feel onwership in the company. But now more firms are extending these benefits to all employees. In many high-technology companies, this is the norm, and many people looking for jobs regularly ask about these benefits.
Companies have to determine how many shares they are willing to put up for stock option investment, who will receive the benefits, and how many employees the company will have in the future so that it can offer an adequate amount of shares at that time. A mistake a firm may make is offering so many options right away that it doesn't reserve any for future employees. The usual purpose of the offering is to help the workers feel an ownership in the business, so the planners need to carefully determine the eligibility, allocation, vesting, valuation, holding periods, and price. All these will determine who will invest and for how much.
Many companies tie stock option investing to retirement plans, but a wise worker will understand the risk involved in depending on these moneys for future income. A good retirement plan will include other avenues than this to assure an adequate income during retirement. In some cases, financial compensation may be better than investing in a company's shares, especially if a worker doesn't plan on staying with the firm for a long time or the firm has a bleak financial outlook. Each worker must determine for himself whether or not the deal he is offered is worth taking. But our futures are secure in God's hands. Psalm 146:5 assures us, "Happy is he that hath the God of Jacob for his help, whose hope is in the Lord his God." Our happiness does not depend on our investment skill, but in our trust in God.