Wealth Building - Share Trading
Share Investing BasicsBuying Shares - a) The majority of investors Buy Shares.
They buy shares as an asset investment, hold them and hope they will go up in value.
Conservative investors buy "Blue Chip" shares, those which are the larger, well known companies, considered
to be a safe investment.
They would never go broke BUT some have in recent years.
This requires the outlay of investment funds. On the US market shares are
usually sold in parcels of 100 shares minimum. On the Australian market
they are in 1000 share lots.
What is their RISK! The risk is that their investment could drop to zero in value
if the company collapses, or a risk of 100% of their funds invested.
Options and PutsBuying Puts - A Put gives the buyer of the put the right but not the obligation
to put an agreed number of shares to the seller of the put at an agreed price.
So if the owner of shares wanted to limit or minimise the risk of owning the shares,
they might buy some puts to "insure" that if the price drops below a certain level, they
have a guarantee that they can offload the shares to the seller of the put at the agreed price.
Now the risk for the share owner is limited to the difference between the purchase price of the shares
and the agreed price of the puts. Share owners can also lock in a percentage of the price gains
they have already made on their shares by purchasing puts at or below the curent trading price of
the shares, once the shares have risen in value. Puts are usually sold on a monthly basis
with a set expiry date and like any insurance policy, once expired need to be renewed.
Puts are sold at a non refundable premium price per share which is kept by the seller.Selling Puts. Any investor with sufficient funds to buy the shares if necessary,
can sell the promise to buy them at an agreed price, or sell puts. An investor may choose to
sell puts if, they think the current price may fall but would be prepared to buy the shares at a
cheaper price, believing this would represent good value for those shares. This is used
by some investors to purchase shares at "discount" because they receive the premium for the puts,
and if the shares are put to them they believe they have bought a bargain.
Other investors sell puts at the bottom of a shares normal trading cycle,
not wanting to buy the shares, but looking for the regular income of receiving the premiums
from selling puts.
The Risk with this strategy is that you will have put to you, shares of a company which has
collapsed and which are worthless or have decreased significantly in value with low
prospects of recovery.
Of course this risk can be minimised by selling puts at one agreed price, and buying puts
at a lower price limiting the risk to the difference in price between the two.
Buying Options The purchaser of an Option buys the right, but not the obligation,
to buy shares at a pre agreed price. By purchasing Options an investor can have control
over the potential profit on those shares without having to buy them, and at a fraction of
the outlay to buy them. The potential benefit is if the share price rises dramatically
during the period of the Option, the purchaser can exercise their right to purchase at the
agreed price and sell at the higher price, realising an instant profit.
Their risk is the premium, or cost of the option if the price does not go up, which
is kept by Option Seller.Selling Options The seller of an Option promises to sell those shares to the purchaser
of the option at an agreed price, if the buyer exercises that right to buy.
The owner of Shares can realise extra potential profit on those shares
by selling options on those shares, thus creating extra monthly cashflow income. Thus the investor
can realise potentail profit from the value increase of the shares, and monthly cashflow from
Option premiums.
The risk here is that the shares might be purchased at a guaranteed profit,
but not at the full profit of a larger price rise.
Because Options and Puts are traded at a fraction of the full cost of the shares, but the
potential profits are the same as owning shares, a greater return on funds invested can potentially
be realised. Of course there are always risks, but by managing the risks significant
potential profits can be realised.
One such strategy for monthly cashflow is to sell puts regularly on blue chip shares at
the bottom of their regular trading cycle, and then if exercised (the shares are put to you
to buy) sell options on those shares until they are exercised at a profit. The beauty of
selling puts is you earn premiums without your funds leaving your bank,
so they also continue to earn interest.
WARNING: As with anything in life, there are risks for the uneducated and savy investor alike,
the information above is general information and not investment advise. You should seek
out qualified advisors, and educate yourself thoroughly before trading shares, options or puts.
We take no responsibility for any losses or damage incurred if you act on the information on this
site alone.
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