The stock market is your key to building wealth. Over time, smart investing will see your money making bigger gains than it would if you did not invest it — bigger, even, than what you could reasonably expect from a savings account or treasury bonds. The stock market is where real wealth is made, and the wealthiest Americans know it.
This is largely because, over long periods of time, the stock market tends to go up. You can take advantage of this with a buy-and-hold strategy that offers “set it and forget it” convenience. But if you want to take things to the next level, you don’t just have to bet on stocks — you can bet against them.
We can’t give you investment advice (and you should follow common sense and good investment rules of thumb to ensure that you don’t speculate away your savings on the market), but we can show you how stocks work and how you can take positions in the near and long term, for and against stocks.
At its simplest, the stock market is just about buying and selling stocks.
Stocks are shares in a company. They’re not quite like ownership shares, but they are similar in some ways. When the company increases in value, so do your shares of that company. So your money can make more money in the stock market when you buy a stock and then the stock increases in value. You could cash that stock out for a profit, so you’ve essentially increased your wealth already.
When you’re buying and selling stocks, the rules are simple: buy low, sell high. But, of course, buying and selling are not the only things that you can do with stocks.
All about options
One of the most common next-level stock techniques is the option. Options relate to buying and selling, but they are not quite the same thing. Let’s talk about how they work.
An options contract is an agreement between two parties. An options contract stipulates that one party to the contract (the option holder) has the right to buy or sell (one or the other, not both) a certain number (usually in increments of 100) of a certain investment instrument (like a stock) at a certain time (between two dates, or before an expiration date).
If the option holder has the right to buy the investments, it’s a call option. If the buyer has the right to sell the investment, it’s a put option.
You can see now that the call vs put distinction allows you to bet for or against a stock, right? Let’s dive a bit more into that.
Betting for or against stocks with options
Let’s say that you think a certain stock is going to rise in value. How might you bet on that belief?
You could just buy the stock. If it rises, your investment will grow in value. And that’s certainly a valid strategy!
But here’s another strategy: You could buy a call option. If the stock fails to go up (or actually goes down), you’re out the price of the option, but nothing more. You’ll simply not exercise the option. This insulates you from risk a bit. If the price does go up, you can exercise your option and get the now more valuable stock at a discount. You can then hold onto it or flip it immediately for a profit. You’ll cut into your profits a bit (since you spend money on the option), but you’ll have the use of your cash in the meantime and, as we mentioned, will have lower risk.
And here’s another strategy: You could sell a put option. Remember, you think that this stock is going up. If the stock goes up, nobody is going to exercise an option to sell it at a lower price — they could get more for it on the open market. If you’re right, selling a put option would give you some cash for nothing. Of course, if you’re wrong and the stock goes down, you’ll have to buy the stock at the price you agreed upon and will be paying a premium.
And all of this works in reverse, too. With options, you can actively bet on a stock going down. You could buy a put option and exercise the option to sell a stock at a great price even after it crashes (you could even do this without owning the stock, because you could always buy it later at its new, cheap price and sell it for the higher option price for a quick profit). Or you could issue a call option — though this is a risky move if you’re short on the stock, because losses are potentially unlimited.
This is hardly an exhaustive list of ways in which to bet on or against stocks, of course. Advanced techniques include spreads, other tricky options moves, and borrowing stocks to short them. You can learn more about those on trusted financial sites. Just remember to stay diversified and keep an emergency fund. Also, never put more than you can afford to lose in risky investments. If you invest smart, you could build wealth fast.