Investment Primer Part 2: Vehicles

By Kevin Judge | June 18, 2018
VEHICLES: There are several methods for investing in the above asset types and classes.

  • Direct Investment: Purchase the investment your self
    • In general, safer than options but lacks the diversification available from mutual funds
    • Leveraging: You can increase your purchasing power and profits by buying on margin, aka borrowing the money to make the sale. This increases the reward, but also the potential of loss.
  • Options: Purchase the right to buy or sell an investing
    • It is safer to sell options than to buy them and safest to sell them when you hold the investment, aka not naked.
    • Calls are the right to buy a stock at a fixed price for a limited time.
    • Selling a covered call means that the seller pockets a premium paid by the buyer who can buy the sellers stock at a price higher than the current price for a limited time.
      • The seller always “win” because if the call is exercised he keeps the premium and a profit compared to current prices. If the call is not exercised he just keeps the premium, still better off than if he had not sold the call.
    • Leveraging: Naked options are considered a type of leverage. Buying calls and puts naked significantly leverage the benefit of guessing right on the market direct. For example
      • Buy a stock for a dollar and sell it for 1.25 make 25 cents!
      • Buy 4 options for 25 cents each and it goes to 1.25 you make $1.
      • Unfortunately, most options expired unexercised and buyer loses all their money.
  • Mutual Funds: Purchase a fund that makes the investment.
    • Diversification reduces risk
    • Professional Management
    • Need to watch for high fees.
    • Index Funds (Exchange Traded Funds) are believed to best replicate market returns.

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