Unpredictable Nature of Stock Market Trading

Forbes Special Situation Survey
The Prudent Speculator

Would you board a plane if you were told that it was going to be risky business? Suppose the lure were champagne and caviar, or perhaps some other favorite food like chocolate milk and tuna fish sandwiches, as opposed to being left behind in a cold dark airport with no food service. Would you then hop onboard?

The fact is that eating and not eating is the least of your worries if you bomb in the stock market. It's a complex and very unpredictable animal...much like the elephant who is having a bad day. Chances are that just by looking at the critter, you'll not know that it has a stomach ache, and there is a chance that it may let you swing giddily on it's massive nose, or, it may get really irritated and stomp your guts out. These are the kinds of things you must take into consideration when working with elephants and stock markets.

Stock trading takes several forms. One that you should study, though, is called option trading. Masters of this mode of stock investing often earn a good living. As a strategy, it presents different risks and benefits than regular stock trading.

Said one expert, "If your option strategies are more like betting or gambling, if you follow some sort of intuition or sixth sense, then you will lose money. If your strategy is to think of options trading as a business and you know about managing a business or you are willing to learn, then you can make money."

What is Option Trading?

Option trading is a way of taking advantage of price movements in the financial markets, risking less money and with greater leverage for profits. One benefit of option trading is that with option trading, is what they call "leverage". The price of an option in comparison to buying the stock outright, is miniscule. By purchasing options instead of shares, you pay only a fraction of the price but receive all the benefits of price movements in the stock itself. So if you purchased say, 10 'at the money' option contracts covering 1,000 shares in XYZ - and the XYZ's share price moved $2 in your anticipated direction, then you have just made yourself a cool $2,000. You have done this, paying only a fraction of the cost of XYZ's stock price. This is leverage - less outlay for more profit. If the price goes against you and remains so until expiry date, unlike other 'derivatives' the most you can lose is your initial outlay.

On the flip side, "Unlike the underlying financial instrument (stocks, commodities etc) options do have an expiry date. You can't just hold onto them until "one day" they become profitable again. When an option has no 'intrinsic value' (as above) then the only remaining component of its market price is "time value". This value is based on the probability that the option will achieve any intrinsic value before expiry date. The closer you get to expiration date the less likelihood of the option becoming profitable, so "out of the money" options will decline in value at an exponential rate as the end of their term draws near."

While option trading is considered risky business, it is no more risky than regular stock trading. Since you are interested in the stock market ways, you should spend time exploring the greater world of option trading. While it is unpredictable, it is no more so than the other trades. If you don't do your homework, it's a gamble, and you're likely to lose. If you do take time to research, your odds increase greatly to make good money. Something to think about.

Of course, there are two ways you can do your part to do your utmost to insure stock happiness and that is to invest in The Prudent Speculator, a Forbes Publication, and the Forbes Special Situation Survey. As investments go, this is pretty much a no brainer. Buy at a low cost, and reap HIGH rewards!