Investing in stocks isn’t as hard as it might appear to people who want to get started. For me it is simple: 1) buy a stock, 2) hold on to it for a period of time, and 3) then sell it. Thats it, nothing more. It might be difficult to pick the right stock(s) and figure out when is the right time to sell but the process is still just those three steps.
The media and financial community would like you to make things much harder.
One reason for that is that “options” are very popular and are talked about constantly wherever you go for your financial news. But I have NEVER bought options and will never feel the need to.
Options Terminology That Will Make Your Head Spin
There are lots of websites out there that will explain what stock options are and explain different strategies. One good one is here and it is run by TradeKing. Many of the online brokers have sections of their websites or whole stand alone websites devoted to options trading because, well, they want to teach you so you can get involved in the options game. Then they can make even more commissions from you.
Options and options strategies are extremely hard for a beginner to learn and should be avoided. The terminology seems to be never ending as we see in this list of terms and strategies you might come across: call options, put options, strike price, covered call, long call, long put, naked put, collar, protective put, cash secured put, bull call and put spread, bear call and put spread, long call and put spread, short call and put spread, long straddle, long strangle, back spread with calls and puts, call back spread, long and short straddle, put ratio spread, butterfly, and there are more but that is enough to make my point. Is your head spinning yet? Mine is.
Options trading gets a lot of hype and social media coverage. If you watch CNBC for any amount of time you will undoubtedly hear someone talk about options. If you spend any time on StockTwits or any other finance message board you will be inundated with options talk and terminology. It seems like the cool thing to be trading these days. But read this:
The above warning comes from here and bluntly tells you the truth: options should be traded by experienced investors only. Beginners should steer clear and NOT be tempted despite their popularity. You see, when investing for your future retirement, you don’t need to trade stocks or options every week or month. You don’t need to “trade” anything, especially not options, to succeed.
All you need to do is pick companies that are going to do well over the long term. Buy stock in those companies, periodically check in on them to make sure you are aware of any pitfalls that may have developed, and hold your stock(s) until you feel the time is right to sell. Warren Buffett has made his fortune by buying and holding on to stocks for long periods of time. He has famously said that his holding time frame is “forever” and that shows you you don’t need to bother with options to make money.