Part One - The Similarities and Differences between Options and Stocks

Stock market investment has been an institutional influence not only in investment but one that has permeated our society ever since the industrial revolution. Not only has it provided a means to finance innovation and expansion, it has also been a cradle that has carried within it public sentiment, and issued from it signals pertaining to the prosperity of the community. It is through this tacit codependence that the juncture of labor and capital is found in the stock market.

Corporations that list their shares on the stock market do so in order to raise capital to fund their operations, to invest in research and innovation, and to expand their activities. In return for providing financial support, the shareholder receives part ownership of the corporation. If the corporation is successful and its profits increase, it may choose to repay the investment made by the shareholder with a bonus to reflect the risk taken, it may choose to reward the investor with a dividend share in profits, or it may choose to reward the investor with additional shares in the corporation.

Ownership of options will rarely carry with it voting rights that share ownership is imbued with, but similarly to options investment, stock investment also is heavily reliant on risk and reward. All of these incidents will result in shares of the corporation becoming more sought after; they will be attributed a greater value. As such, market participants comprised of other investors will be prepared to invest more capital for the same share in the company. It is this reaction to corporate prosperity that provides a capital gain on share investment.

Indeed, some corporations will elect not to pay dividends and reinvest profits into their operations. If management is perceived by the market to be sound, the share price will still experience a capital gain. This invariably occurs when investors are of the opinion that the corporation will experience solid growth into the future.

A stocks value will usually reflect the value of the corporation, but particularly in developed stock markets, will often reflect an element of hypothesis as to the future prosperity and growth of the company and its profits. Indeed, whether or not a stock pays dividends, or if it is subject to the markets projection of its worth, anticipated cash flow in the form of either dividend or capital gain will necessarily have a present day value also. Discounting this cash flow to identify its present value will often play a large part in the price attributed to the stock by the collective market at any one time.

Of course, negative influences will also have a commensurate dampening effect on share prices. While both stocks and options markets are susceptible to the forces of demand and supply, stock investments are also subject to numerous external influences. Economic, managerial, political and social influences will also play a large part in shaping the market environment. These will of course have an indirect effect on options prices as they too experience pressures resulting from the same circumstances.

 

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