This article teaches what a stock option is and how to profit through stock options investing. This is key #8 in a series of 10 keys to successful stock options trading.
Welcome back, this week is week number eight out of the ten part series on how to trade stock options successfully. In this article I will discuss saving.
Savigs is one of the most critical parts to any successfuly financial strategy; if you spend your gains as soon as you have them you will never reach true wealth. It is only by the miracle of compound interest that your gains will truly turn into a fortune.
Compound interest is the process whereby annual returns are added to the original investment and reinvested, rather than being spent or taken out, thereby creating a larger amount to invest again, as this process is repeated the compounding exponentially increases the returns over the lifetime of the investment. For example if you invest $10,000 a 20% return increases your portfolio to $12,000. A 20% return on that increases your portfolio to $14,400, 20% on that is $17,280, 20% on that is $20,736 and 20% on that is $24,883 which is a total return of $14,883.
In the next example let's assume after you made your 20% return you took it out and spent it. Your next 20% return would only be the same $2000 because your initial investment is still only $10,000. If you consistently got the same return as above and kept taking your money out your total return would be $10,000 or $4883 (50%) LESS than if you had kept saving your money and reinvesting it. The longer you leave your money in your account the more pronounced your returns will be and the greater the effects of compounding will be.
Einstein once said "Compound interest is the 8th wonder of the world". When applied to options trading we can replace the word "interest" with "return on investment". That means if you are winning and have a good return on your investment don't take out the profits in your account to spend on a new boat, car or house. Re-invest your profits and if you are doing everything correctly the miracle of compounding returns will exponentially increase the size of your portfolio.
This is only a short article this week. Next week we have a lot to discuss when we talk about money management.
US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
Roger Cox was born in New Zealand and has lived in Los Angeles for seven years. He was President of a freight company at LAX before setting up his own consulting firm. Roger has successfully traded stock options for over 4 years and teaches other people how to successfully trade at
http://www.prosperitywithoptions.com
