While there can be a lot of profit in trading or investing in the stocks market, there is also a chance of risks, because the value of your share of stock can go falling. How can you protect yourself facing this risk?

Take a look at this story. Let's say that you purchase a stock of XYZ Company at 10rs per share. You want to hold this stock for the long time investment, with the chance of selling it at a good value in the future; maybe even as high as 15rs in the future (maybe 2 years from presently).

However, you're also concerned about the risk that your XYZ 10rs stock may go falling in price, like maybe to 5rs. If this occurs, you will have lost half of your capital.

So, what do you do? You begin into an exchange with ABC Company (different from XYZ), which ensures that if even if the price of your XYZ 10rs stock goes fall the stock market to 5rs even 2rs, ABC will ensure that they will be ready to purchase your stock at the same 10rs that you purchased your stock for (and this is only if you prefer to sell the stock to them).

This method, you are protected from the "downside" risk if your stock falls, but you are still capable to get any possible "upside" profit if your stock goes high in value. In order to formalize this arrangement, ABC Company issues you a part of the paper as proof that your agreement exists. What is this part of the paper called? It's termed an "option" or a "stock option".

Why's it know as 'option'? Because you, the holder of the option, now have the choice or option to sell your stock to ABC Company at the agreed 10rs price if you prefer to use or apply the option. While you are the holder of the option, ABC Company is the one willing you that choice, so it is termed the issuer of the option.

The option explained above, in which you have the decision to sell stock to ABC Company at a set value even if your stock price moves down is more accurately known as a put option.

There's also a different option called a call option, which, in a process, is the inverse of a put option. Rather of having the option to sell a stock at a certain value even if the price goes below, you have the option to purchase a stock at a certain price even if the price goes up. Since the concept of a call option is just as great as a put option, it will fully be included in its own unique article
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Note that in real life, you usually do not purchase options direct from the issuing company (in our example above, it was ABC Company). Rather, you would purchase or sell options from an options exchange which is related to a stock exchange but where options are traded rather of stocks. you can take Option Tips from any best advisory company.

Author's Bio: 

I am mrinalini solanki I am stock market research expert. we provide best Free Option Tips .