When it comes to futures and options, Eric Tyson, author of "Investing for Dummies," has a simple definition for these types of investments. "Basically, they're gambling instruments," he says.
An option is a method of putting down a few dollars on the chance that the value of a stock will increase. You're not buying the stock; you're buying the opportunity to buy it if the price reaches a predesignated level. Of course, if the price doesn't do what you think it will do, you will lose the few dollars per share that you advanced. If you wanted hundreds or thousands of shares, you lose a lot more than a few dollars.
Futures work much the same way. You're betting that you'll make money on coffee or fruit or natural gas when the product comes to market. It's kind of like playing the role of banker in a farming community. You forward the money and hope for the best price. Unfortunately, if the crop fails, you lose.
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