Stock Option Station

Written by Joy MacKay
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If you've tried to play the stock market on your own, you've probably wished there was a handy stock option station you could turn to when you have questions. You aren't alone. Although many people make a living riding the stock market's ups and downs, you've got to have specialized knowledge and killer instincts to find lasting success with stock market trades.

We all want to make the maximum amount of money from stocks and we all want a better bottom line. Even if you've never played the stock market before, there are some general tips you can base your strategies on that will not lead you astray. Some of these tips are free, available from knowledgeable stock market professionals who post their advice online. Or, you may feel more comfortable putting yourself in the hands of a broker. Either way, there are certain things you should know before you dive into the thrill ride that is Wall Street.

Reading the Market

If you know how to successfully read the market, you can always profit from your trades. No matter what kind of turn the market takes, you can decide your method of trading. If you can anticipate the market's movement and act accordingly, you can make money on virtually every trade. Often, this type of talent is a skill earned through long hours spent studying the market; however, there is always room for beginner's luck, too.

The key in trading of all kinds is to stick to one method. Everyone wants the "latest and greatest" hot tip and is hoping that luck and gambling will bring in a huge profit. Unfortunately, the key will always be consistency. No matter which method of trading you choose or which trading rules you follow, you will make more money by sticking to the rules you have set for yourself. Think of your investment strategy as your floor plan--you would not begin building a house with one set of floor plans, and then build the second story with another set.

Trading on the Index

Perhaps so far you have only traded individual stocks. While this is a fair introduction to the stock market, it is certainly not the only way to trade. In fact, there are advantages to trading on the index itself. There are more ways to profit when you're not tied to individual stocks.

Suppose that you trade on the S&P index, or perhaps on the NASDAQ index. By trading in this manner, you can decide to buy, sell, or hold each day. This means that you have less risk than you would by investing in individual stocks, and you can profit from both bear and bull markets.

Learning Option Strategy

When you hear someone talk about stock options, she isn't necessarily talking about her company's bonus program. Stock options come in the form of "puts" and "calls," and they give you the option to purchase a stock at a certain price within an agreed-upon period of time. If you purchase a call option, you are reserving the right to buy a particular stock at a particular price for a period of time.

For example, you may purchase a call option that lets you buy 100 shares of Company A's stock at the current price of $20/share anytime between now and three months from now. Similarly, if you purchase a put option, you may sell 100 shares of Company A's stock at the current price of $20/share anytime between now and three months from now. Stock options allow you to ride out fluctuations in the market and maximize your potential for buying low or selling high.

If you can learn to successfully read the market, you can develop a virtually foolproof option strategy. This can mean the difference between a merely average return on your investments and huge profits.

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