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Whereas there is often significant amounts of success in buying and selling or investments in stocks, there is also a fantastic deal of hazard, considering that the value of your share of stock can go down. How can you protect yourself alongside this risk? Consider this story. Let’s say that you actually buy a stock of XYZ Company at $10 per stock. You intend to keep this share of stock for long-standing investment, with the likelihood of selling it at a wonderful price in the future; maybe even as high as $15 in the future (maybe 3 years from now). However, you’re also worried about the risk that your XYZ $10 stock may go down in price, like possibly to $5. If this comes about, you will have wasted one half of your money. Thus, just what should you do? You enter into a contract with ABC Company (different from XYZ), which promises that even in the event the price of this XYZ $10 stock decreases within the stock exchange to $5 or maybe even zero, ABC will guarantee that they’re going to be glad to purchase your share at the same $10 which you bought your share for (but this is just if you opt to sell the share of stock to them). In so doing, you really are protected against “downside” risk if the stock dives, but you still are capable of getting any promising “upside” prize if your share goes up in worth. In order to formalize this arrangement, ABC Company issues you a piece of paper as evidence that your particular arrangement exists. Exactly what is this piece of paper termed? It’s known as an “option” or a “stock option”. For what reason is it labelled as an ‘option’? Because you, the holder of your option, have the “choice” or “option” to sell your stock to ABC Company at the particular $10 price once you elect to utilize or “exercise” the option. While you’re the owner of your option, ABC Company would be the one giving you that choice, thus it is called the “issuer” of the option. The option discussed above, wherein you actually have the choice to sell a stock to ABC Company at a set price tag even if your stock price goes down is more specifically named a “put” option. There’s also another option termed a “call” option, which, in a way, might be the “opposite” of a put option. Instead of having the choice to sell a stock at a selected value even when the price decreases, you have got the choice to procure a stock at a certain selling price even in the event the value surges. For the reason that idea of a call option is just as extensive as a put option, it will best be handled in its unique sole video. Be sure to note that in real life, you ordinarily do not procure options directly from the issuing company (in our case in point above, it was ABC Company). Instead, you might probably buy or sell options off an options “exchange” that is definitely similar to a stock exchange but where options are traded in place of stocks. http://www.youtube.com/watch?v=Ren8kZ5nJ4c