Investing in Stocks for Risk-Adverse Borrowers

One of the recommended strategies to build wealth without putting too much effort is to invest in stocks. You buy shares of a promising company and then sell them when their price goes up. While long-term investors do this, many do not know that this strategy involves high risk because it requires the highest margin. One way to limit risk is to use stock options because they have a lower margin and hence involve less risk.

Stock options represent options which serve to trade stock and are based on stock. When you trade them, you do not have to buy or sell the underlying stock. A single stock options contract is typically used to trade every 100 shares of the actual stock.

Trading stock options offers two main advantages. First, it is less expensive to buy them compared to the underlying stock, and the margin is lower. Investors who trade with small trading accounts benefit from this because they invest in stocks they would otherwise be unable to. Second, trading long call options involves less risk, which is limited to the money paid for them. This means that trading them involves less risk, and investors know this in advance. Third, traders earn profit, being the price of a put option, with this serving as a buffer between the stock’s purchase price and the trade’s breakeven point.

Of course, there are other options for low-risk investment besides stock options. Risk-adverse investors can consider certificates of deposit, bonds, and money market funds. Certificates of deposit are risk-free because they are insured. Given that institutions keep your money on deposit over a specified term, they offer higher interest rates compared to those on demand deposits. Certificates of deposit may be offered with a fixed or variable interest rate, but fixed rate is more common. Bonds, also known as debt securities, are another investment instrument and are issued by authorized issuers. The latter owe holders debt and pay interest for the use of their money. The principal is repaid at a later date, which is called maturity. In contrast to stockholders, which have equity in some company, bondholders are actually creditors. The interest rate to be paid to them is influenced by different factors, including the issuer’s creditworthiness, the length of the term, and current interest rates. There is one investment risk with bonds, referred to as interest rate risk. Bondholders receive a fixed rate of return over a specified period. If the interest rates rise, the price of bonds falls accordingly. Still, bonds are considered a less risky investment instrument because issuers are obliged to return to holders the face value of the security. Stocks do not carry such promise. Second, compared to the stock market, the bond marked has not been as vulnerable to volatility and price swings.

A third instrument for risk-adverse traders is money market funds. They come in two varieties – retail money funds and institutional money funds. The latter are characterized by low expense shares, offered by fiduciaries, governments, and corporations. Retail money funds can be non-government funds, government-only funds, and tax-free funds offered to individuals. Compared to savings accounts, the yields are usually higher. In terms of risk, they are a safe investment instrument that offers decent returns. Moreover, they are usually liquid in that investors can get their money out of the fund in just a couple of working days.