In Singapore, trading options is a popular investment choice with the fast-growing financial market. However, most people find it difficult to enter this field as they lack knowledge in business and investing. It is a good idea for beginners not to trade options.
In an ideal world, everyone is knowledgeable in all areas of life and can make the right decision when required. In reality, however, most individuals are ignorant about investments and rely heavily on their advisers, which works well when you have a multi-million dollar portfolio that requires constant attention from financial industry experts or when you commit your wealth into passive income stocks that require tinkering less frequently.
But what happens when you have a small amount of money in your bank account and want to invest in something that will generate income? Like many other beginners, you may consider trading options as a way of generating income.
What is an option?
An option is a contract that allows the buyer to purchase or sell an underlying asset at a specific price during or by a certain date. For instance, if the stock price of Company A was $1.50 mid-January, you can buy one call option with expiry on 31st January at prices ranging from $1.72 to $2.00 per share, which means you are guaranteed to receive between $1.72 and $2.00 when selling your shares before expiration day even though the actual market price may be lower than this range, but not higher than it.
It is worthwhile noting that the greater the period before the expiry date, the more expensive it is. Unfortunately for beginners, this means your financial losses may become larger as time passes.
Trading options in Singapore
Regarding important factors to note when trading options, the high risks involved should be a significant concern. Like all contracts, options come with expiration dates which mean they can expire any minute without notice, and you will lose all your money if the stock price does not move at least once within that time frame.
In addition, stocks do not always follow market trends and investors need to pay attention to the underlying assets; otherwise, they may end up losing their investment entirely if an unexpected event occurs suddenly, such as company liquidation, and this is something you cannot predict unless you are a professional trader yourself.
It is not a good idea for beginners to trade options as they lack the knowledge and experience required to understand option contracts and read between the lines of market trends.
Other ways for beginners to invest in the stock market
Although beginners can turn their loss into profit by trading Singapore stock options, there are still other ways to make money from stock markets without relying on highly volatile investments such as options. In addition, it is also advisable for them to invest in passive income stocks, which do not demand much work from traders but usually provide stable returns daily or monthly.
Beginner traders must have a Plan B
It should be noted that this article was written with beginners in mind, and those who have never traded before, rather than experienced investors who know what they’re doing. It will be beneficial for you to know about creating a ‘Plan B’ in the unfortunate event that your investment does not go as planned.
You can rest easy knowing you have a plan B to fall back on, risking less money while still leaving you room for growth should your potentially successful trade fail to pan out. If trading is your passion and risk-taking is something you enjoy, it’s worth considering investing in options but make sure you’ve done your research first.
Beginner traders interested in options trading are advised to use an experienced and reputable online broker from Saxo Bank and trade on a demo account before investing real money.