Did you know that you can invest in the stock market without buying any stocks? It is true. We all are familiar with the traditional form of trading, where we buy shares to be part owners of a company. However, there is also options trading. And it involves no ownership of securities at all.
How trading options works
This is how options trading works: You pay an amount known as a premium for an option contract to have exclusive rights within a specific time frame (the expiry) to purchase or sell the underlying security at a predetermined quoted price (called the strike price). If you wish not to use those rights, then do nothing, and the option expires worthless after expiry.
The beauty of option contracts is that they are easy to implement compared to buying stocks. For example, you can buy options on US stocks listed on the Singapore Stock Exchange. You have access to fundamentally sound companies just like how you would have with owning their underlying stock.
Benefits of options trading
The most significant benefit of using options is that one does not need more than S$5,000 just to get started, allowing retail investors to compete against market professionals for potentially better returns by taking more prominent positions due to lower costs!
Another advantage is that it provides more flexibility than traditional stock trading. An investor typically has less than one month before dealing with capital gains tax implications upon selling his shares. However, with options contracts, the investor can hold on for as long as he wants before exercising the option, thus giving him more time to make a well-informed investment decision.
Furthermore, options trading is ideal for those who do not have much time to monitor their portfolio since you are not required to watch it every day like traditional stock trading. One has to choose high-quality stocks that one believes will perform well in the future. Then, put them into an Option Strategy Portfolio known as OSPs, where your risk exposure is diversified using options contracts. No single position can affect profits or capital significantly should market conditions deteriorate suddenly.
What’s more, if the selected stocks he bought performed well, this allows him to benefit from substantial profits compared to buying shares alone. In addition, if one’s stock selection was wrong, then the investor only needs to suffer limited losses since he does not have much capital tied up.
Risks associated with options trading
It is important to note that although this strategy may sound attractive, options trading risks are involved. Before putting his hard-earned money into, anor must know what type of options to trade and how exactly a particular OSP works before can quickly do this by getting professional financial advice from experienced investment professionals who have been through rigorous training courses on investment products such as options, even though you might already have a finance or accounting background.
Otherwise, consider reading material from reputable education providers such as the Financial Markets Course jointly offered by Singapore Exchange Ltd and PIMCO Asia, which will benefit you greatly to be well equipped with all the necessary knowledge to trade options in Singapore.
In conclusion
Trading options is a better alternative to traditional forms of trading provided that one has developed a thorough understanding of how OSPs work and what type of options contracts would best fit his investment needs.
Options allow retail investors to compete against market professionals for better returns by taking larger positions due to lower costs. Beginner traders are advised to use an experienced and reputable online broker from Saxo Bank and trade a demo account before investing real money; for more information.
