This blog post will be slightly different than all my other entries. This post will discuss some basic information that everyone should know before they invest. In addition, this blog post will consider two types of investing, investing in pure shares, or trading options of stock.
The first category of this post will be discussing investing in individual shares. An investor should know that investing in shares can be risky and that they should only invest money that if they were to lose it, it wouldn’t affect their everyday life. There are three main categories describing how large a company is. The statistic used to measure this is market cap. Market cap is the total value of all shares of a company. A large-cap company is one that is valued over $10 billion. The advantage to investing in these is that large-cap companies are considered lower-risk. This is because large-cap companies are typically well-known and will not be going away anytime soon. These are the safest stocks to invest in, however, the upside is somewhat capped because the companies are already established. An example of this is, Apple. The next category is mid-cap companies. These have a value of between $2-$10 billion. Mid-caps typically offer more growth potential than large-caps however, the mid-cap range is typically where a company either blows up successfully or self-destructs, investing in mid-caps is in general, more risky but with a higher reward potential. An example of this is, Crocs. The last category is small-caps, which are valued at $300 million to $2 billion. These are typically stocks that are either outdated companies that continue to fall, small companies that serve a niche market, or brand-new companies. Small-caps have the most risk involved, however, if an investor successfully picks out a small-cap and it eventually becomes a large-cap, the reward is massive. An example of a small-cap is Kodak. The chart below shows an example of how to properly structure an investors stock portfolio, this highlights areas where it is okay to take risks and areas where safer options are better.
The second category is trading options. Options trading is more complicated than trading pure shares. According to TheStreet Investing, “An option is a contract that allows (but doesn’t require) an investor to buy or sell an underlying instrument like a security, ETF or even index at a predetermined price over a certain period of time.” In simpler terms, an investor can buy an option of a stock thinking that it will go up or down, and if it does before the expiration date of the option, the trader can buy the shares at the price of the day the option was first bought or sold at. This can used to turn a high-return quick profit on stocks, however, is much more risky than trading shares as an option can expire worthless if the stock does not reach the price of the contract. In determining the stocks to trade options on, trader usually use “Greek” numbers for measuring volatility in a stock. Ideally an options trader would want to see higher levels of movement in a stock to trade options on. The chart below illustrates the basic concepts of buying-/selling options based on what an investor predicts the stock will do in the future.
It was very interesting to learn about options trading! I have read trading blogs about ETFs, but I never really understood what they were. I also have many of my shares in the high risk, high reward category, but only because I do not have much of my money invested. The triangle that you provided is definitely a good way to go if I plan on investing my future income. Is there an easily accessible platform for options trading?
This was such a helpful post! I’ve always found the stock market and investing very interesting but have never personally learned too much about ti becaue the terminiology always seems confusing. The way that you explained market caps and options trading was self-explanatory and made the complicated concepts a lot easier to understand. Een for people who aren’t interested in stocks and trading, it is a vital skill to remain financially responsible and successful so it is important for everyone to learn.