Options Trading vs. Mutual Funds

As covered in another topic, if you trade options, you are involved in very risky and complicated investing. The risk is ultimately limited to the cost of the premium or option, but that can be a large sum of money. For example, a June 400 call for Google can cost you around $2800!

The premium in an option contract could be only 28, but if you have a commitment of 100 shares, that is a big deal. You would have to multiply the premium by the 100 shares and come up with $2800. Most investors, of course, deal with much larger sums than just a mere 100 shares.

Options, like most things, have expiration dates. As the expiration gets closer and less time is left on the option, the worth of the option itself can quickly whittle away to nothing. As more and more days slip by, the stock becomes less and less likely to gain enough price increase to cover the costs, thus making it a risky investment.

If you want a more conservative and steady way to invest, look into investing in funds. Funds are a conglomeration of stocks, bonds, commodities and more. If you are an investor who purchases a mutual fund, you get to own a portion of all the instruments or things that the fund itself buys. Your fund will be managed by a fund manager, who will have the available resources, time, expertise and knowledge to make a smart choice when it comes to investing with that fund.

You would have to pay a fee to be part of the mutual fund, but you are able to pool your investment capital with other individual investment capital to create a stronger place in the market. By pooling your capital together, you can have control over a much larger share of bonds, stock, etc than just the average single individual could manage.

Large funds can influence stock prices as well, so these investing strategies will affect the overall financial landscape.

If you want to have options in your investing strategy, but lack the time, knowledge and experience to effectively manage this many options, mutual funds are a great choice. No matter what, though, you will have to do some research. You will have to research the actual mutual fund itself, as well as the manager to make sure that they are reputable before you put your money down.

Some funds also will just purchase options contracts and speculate just the individual trader would do. Other funds, however, will actually purchase the stocks and then issue stock options out to their members. This can produce profits, but it is more of a short-term trade. As the prices on the stocks increase, the options are exercised and the income growth opportunity is limited.

Mutual fund investors are typically looking for a long-term income growth versus a shorter span time. They are usually looking for a long-term profit increase. Do your homework and a little research to make sure that the fund you invest in is the right one for your portfolio and investment personality.

         

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