investment question about "options"?

Question

I was reading on yahoo finance about an "options"..well..option. It seems like soemthing i would want to get into. However, i am not completely sure what an "option" is.

I realize the importance of saving money and investing for the future. I would like to start now. I am currently 25 and on my way into the wonderful world of marital bliss. I opened a Roth- IRA? when i was 18 and i have not been able to put any money into it. I would also like to trade some of the stocks i have in the IRA towards something that may make me a little more money. I am worried that i may lose the little bit of money i do have invested in my retirment.

What would be a safer option for my IRA stock that can make me a little more money, but won't end up burning me. Right now i am currently involved with VanKempen? and ..i forget the other one.

I need to know , at my age what are some other options i can look into for investing towards my future. And i mean actual "investments".

Thank you!

Both of you answers were extremely helpful. Especially the second one, you really helped me latch onto the whole "options" idea. I understand it completely now. I don't think it is something i would want to do lol

I really appreciate both of your answers, and i will wait a few more days to choose one. :)

Answer 1

Your question is a little confusing. There is an actual investment called an option. That is what I thought you were asking about at first, but then didn't know as I read your whole question.

Good for you for thinking about your retirement and knowing that you have to start saving. Time is your greatest ally and you have to figure out a way to start funding your retirement account(s) ASAP. Every year you wait is bad.

In general risk and reward are linked. That means that a high risk investment is more likely to have a high return (it is also more likely to lose money). You generally can't find something that has a higher yield and is safer. It doesn't work that way. Since your time horizon (when you need the money -- retirement) is far away your portfolio should be high risk. You can afford to lose 20-30% of your portfolio value because you have the time to make it up. Of course that has to be balanced with your personality, some people can't stand to see their investments decrease in value and can't handle higher risk investments.

Now, onto an 'option'. Options trading, buying and selling is one of the RISKIEST ways to invest. An option is reserving the right to buy or sell stock at a certain price in a specific window of time. That wasn't to clear, so let me give you an example.

Shares of ABC company are selling for $50 each today. You believe in ABC, think they're great, they're growing, they're undervalued, etc. You think that in a year ABC could be $70 a share. One way to invest is to buy a share of ABC. In a year, if you are right you can sell that share for $70. You are so sure that ABC is going up that you decide to buy a call option on ABC shares. You buy a 1-year call on ABC for $55 and that call costs you $2/share. For your same $50 you have bought the right to purchase 25 shares at $55 anytime in the next year. If the stock does go to $70 you make the difference between $70 and $55 on all 25 shares. You just made $275 (minus the $50 that your options cost)! Sounds great right? Well, there's a catch, if ABC stock is $55 a share (or less) in a year then your option expires worthless and you have nothing. Very high risk, potentially very high reward. Options trading is for people with money to burn and strong stomachs!

Hope that helped.

good luck!

Answer 2

First, congratulations on your wanting to invest for the future at your age. That might seem like basic common sense, but a lot of people don't do it.

If you are referring to call and put options on stocks, I would suggest that you do some careful studying before you try them. They're very tricky and it is easy to lose money on them. (I have traded them, so I know.) If you're not an experienced investor, your broker probably won't approve you for options trading anyway. They are best suited for sophisticated investors.

You have a contradiction to deal with. "Safer" investments do not make more money. They make less money. Investments with more risk have a higher potential to make (and lose) money. Potential return is inversely porportional to safety. The trick to successful investing is balancing the amount of risk that you are willing to take with the potential gains that you wish to make.

For your IRA, you may want to find a good growth fund. It will go down from time to time but the long term trend of the stock market has always been up. Don't worry about the downs. You've got 40 years until you need the money. If you really can't stomache a little risk, then consider a balanced fund. These hold both stocks and bonds. They typically make less money in strong markets but lose less in down markets.

This is a very complex subject. Entire books are written on it. You may want to get a good book on basic personal finance and investing. Or, check your local community college or adult education program for a class. Nothing helps investment success like a little knowledge.