How To Invest

By Daniel Brouse

Investments and Finance 101

  1. Arbitrage: Arbitrage is a risk free investment strategy. Arbitrage involves at least two simultaneous trades that result in a profit from a difference in the price. The trade exploits the price differences of a financial instrument. For instance, purchasing a stock on the London Stock Market (LSE) and at the same time selling it for a higher price on the New York Stock Exchange (NYSE).
    • Interest Arbitrage: Interest arbitrage is a form of arbitrage where you take advantage of differences in interest rate returns. For instance, borrow money at 0% and put it in an FDIC insured saving account yielding .5%.
  2. Futures Trading: Futures trading involves buying or selling an option on a financial instrument that may be exercised at a later date.
    1. Stock Options: Stock options are the buying (call) or selling (put) of stocks in the future. A call gives you the option to buy a stock at a given price for a given period of time. A put gives you the option to sell a stock at a given price for a given period of time.
    • Covered Calls: Selling a covered call is a risk free investment strategy. For example, start by buying 100 shares of stock (covering yourself / covered) that trades options. Purchase 100 shares of Archer-Daniels-Midland Company (ADM) at $43. Then, you can sell a call option for the next six months. The strike price is $47. If the person buying your call wants to exercise the option, they will pay $47/share resulting in a $400 profit. For the option, they will pay you $1.17/share ($117) today. In any event (whether they execute the option or not), you get to keep the $117.

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