Understanding Options Trading And The Importance Of A Broker

In the world of investments there are numerous terms that are thrown around that new people to the world of investments have a hard time understanding

. This is no surprise since many investment terms actually use words that have nothing to do with what they actually are.

For instance, consider the terms: options trading. Trading is one of the most misused words in the world of investments. When you see the word trading involved in the world of investments you may picture trading baseball cards with a friend. However, this is completely inaccurate. Trading in the world of investments actually means: selling or buying. There is no trading involved. There is a passing of money from one party to the next.

Therefore, options trading is best defined as options buying or options selling. Since no trading is involved. If you are new to the world of investments you may also not be aware of exactly what options are defined as. However, options are very simple to understand.

Consider that you have found a property investment that you wish to purchase. You have found a good piece of land at a reasonable price. You may wish to purchase this property to turn around and sell at a higher fee or perhaps you wish to build on the property. However, in this example lets say that you dont have the complete funds necessary in order to obtain this property. At the same time you are aware that you will have the funds within a few months, but you are fearful that the property will sell before you acquire these funds.

When a situation like this happens you can contact a broker and set up options trading. This is where a broker will design a contract between you and the seller of the investment.

Lets say that you will have the money in three months to purchase this property. You can obtain a broker who will fashion a options trading contract that will state the selling price of the investment and your intention to purchase the property by a specific date. You will then be required to place a lump sum of money down to begin the options trading process. Your broker will determine this dollar amount based on the actual selling price agreed upon by you and the seller.

Perhaps the property is in the range of $100,000. You may have to pay a fee of $5,000 to $10,000 to hold the property. During the term of your option the buyer is not permitted to sell the property to anyone else. At the end of the option you have the option to purchase the property at the rate which you originally agreed upon in the contract. You can additionally choose to stop the process at this point, however, you will not receive your options trading fee back. Many people look at this like a layaway plan between yourself and the seller orchestrated by a broker.

This is the basics of options trading and the use of a broker to procure an investment that you truly want to get involved with, but that you cant immediately afford.

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