quick note on stocks

...because:

1. so many people have heard these terms and don't really know what they mean

2. the words themselves sound confusing, but actually are logical and alot of can be figured out aprioi.



option

a stock option is exactly what it sounds like. you have the option to buy or sell a stock at whatever price you agree upon; you can do this anytime you want during the agreed upon period of time.

margin

buying on 'margin' means that you are buying stock from borrowed money. you must open a 'margin account' to do this.
when you buy with borrowed money your risk and return are amplified.
when you borrow money and the price of your asset goes down, you lose your money as well as money that you had to pay back in the first place. when the price of your asset goes up, you reap gains from money that wasn't yours, but you don't have to pay back all of those gains.

long vs. short
1. buying long is what is normally thought of when purchasing stock.

it refers to buying it in hopes the price appreciates.

2. selling short is sort of the opposite but a little more confusing.

when you "sell short" what you are actually doing is borrowing someone's shares (on margin) and selling them at the market price.

You receive however much money they sold for. then you hope the price drops so you can buy back all those shares at the lower price. and then return the shares to whoever you borrowed from. Your selling price - your buying back price = your profit - not including taxes, fees, etc.



call vs. put

1. call options are the option to buy a certain amount of stocks at a certain price in a given time period. in this case, obviously, you want your security option to appreciate in price, so you can buy it at that established (lower) price - that is your 'option'.


2. put options are the option to sell a certain amount of stocks at a certain price in a given time period. in this case, obviously, you want your security option to drop so you can sell it at that establish (higher) price




i hope that clarifies the normally ambiguous ideas many people hold about some confusing (at first) stock terms.