Monday, May 17, 2010

How to Make Money in the Stock Market

When I'm asked how to make money in the stock market, I inevitably am compelled to say, "trade stock options." It's not that there isn't money to be made in the stock market, it's just that for the vast majority of people looking to make a buck trading stocks options trading is the better alternative. I have to answer this way because people who typically want to know how to make money in the stock market really want to know how to make money in the stock market fast - and truth be told, trading stocks is simply not fast enough for most people wanting to dabble in the stock market.

So Why Is Options Trading a Better Way to Make Money in the Stock Market?

I thought you'd never ask. Options trading is FASTER. Options trading is also exceedingly efficient. Most importantly of all, options trading provides the highest return for a fixed amount of risk (in the case of cash options). A trader working in the cash options market (going long / purchasing puts or calls) limits the amount of potential loss to the amount of the cash invested, while leaving the maximum profit potentially unlimited. The beauty of this system is that in many cases a worthwhile amount of trading profit (over and above transaction costs) is possible for a retail trader (with a small amount to invest) in the options market, whereas the retail investor (for all intents and purposes) is shut out of making decent money (in a short time) in the stock market. I cover this elsewhere, but suffice to say options trading leverage makes all the difference.

It's Still Important to Learn How to Make Money in the Stock Market

One consolation for learning how to make money in the stock market is that the knowledge gained is not lost when a trader makes the jump to options trading. Many of the terms you learn when trading stocks (bid, ask, commission, spread, return on investment, leverage/margin) mean the very same thing in options trading (see a glossary of options trading terms). The principal difference between the two is that owning a call option (for example) gives the option holder the right to BUY the underlying stock, rather than outright owning the stock itself.

Learn more about options trading:

Teach Me to Trade
Options Trading Tutorial
Binary Options