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The world of finance and investing can be confusing and challenging, yet obviously rewarding if you obtain essential savvy about trading options and make wise choices. For instance, it’s important to know the difference between option trading and conventional stock trading.
While risk is always a factor in trading, you can significantly decrease your risk and increase your chances for success by learning and implementing key option trading techniques.
Brief Introduction to Trading
So what is trading all about? Most people have at least heard or read about the stock market, and related terms such as NASDAQ, option trading, penny stocks, Forex currency trading, and stocks, bonds, and mutual funds. What does it all mean and what are your best trading options?
In simplest terms, the stock market is an entity created for the trading of public and private stocks or shares as investments into companies, allowing individuals to share in the profits. This, of course, indicates the inherent risks, depending upon the success or failure of a company. NASDAQ is the acronym for National Association of Stock Dealers Automated Quotations, the American stock exchange that provides an electronic screen–based trading market for individual stock traders worldwide.
Option Trading vs. Conventional Stock Trading
Numerous trading options exist, including option trading and conventional stock trading. As an investor, your obvious intention is to increase your buying power and decrease your risk. Option trading is the best way to do this, as it provides you with the benefit of exercising your right (option) to engage in stock transactions or not, rather than the obligation to do so. You can choose to buy or sell options, based on speculation of their rise or fall in value.
Conventional stock trading requires you to place an order with a stock broker or do it yourself online, choosing which stock/s you wish to buy or sell. You can either continue to use the services of a stock broker or educate yourself about the best stocks to choose, as well as gain understanding about different types of orders, including market orders, stop orders, limit orders, and others. You typically must invest more, and put yourself at greater risk, as you become obligated to purchase the stock/s.
As you contemplate trading options, you should understand options terminology:
• Binary option: This option features a financial product in the Exotic Options group, which pays a fixed percentage of your investment, upon expiration. The primary advantage of this option is you can reap a high ROI (Return On Investment) in a short period of time.
• Standard option: This option represents the right to buy or sell shares of stocks.
• Call option: This indicates the expectation that a stock price will increase by expiration time.
• Put option: This indicates the expectation that a stock price will decrease by expiration time.
Binary options are more beneficial than standard options for the following reasons:
• You can purchase the right to buy/sell stocks, rather than purchase the stocks themselves.
• Your risk exposure is limited to your investment, rather than being unlimited.
• You have choices of hourly or daily expirations, rather than automatic expiration dates.
• You typically have no collateral required, rather than a potential collateral requirement.
• You receive payout based on your investment, rather than risking losing your entire investment.