It was brokerage firms which first helped to get American people interested in the stock market and now they are starting to do the same with stock options, which are a little bit riskier for investors. This means that brokers are benefiting while some small investors are not.
Options Trading & The Small Investor
The stock market is enjoying new highs at the moment and as a result, many brokers are pushing options as a great investment opportunity. In the past options trading was the exclusive domain of Wall Street traders, but brokers are now promoting options as a profitable investment for any everyday investors. This may well be true, but many investors feel that the ones who are truly benefiting are the brokers themselves.
There has not been a huge amount of research carried out regarding how successful the average small investor actually is in relation to investing in options, but according The New York Times, the majority of people who were trading option last year experienced returns which were only around 20% of those experienced by people investing in the traditional stock market. If this is an accurate representation, then it does seem that options trading may not be for everyone.
What This Means For Brokers
It is not common for brokers to actually release any official data, but it is clear that the options trading sector of the industry has experienced substantial growth in recent years. In fact, derivatives on the whole have been rising since 2008. This is great news for brokers because the commission earned on options trading is around double that of the average stock market trade. With that knowledge it is easy to see why brokers are so keen for the rest of us to make investments in options.
So does all of this mean that the small investors should not be investing in options? Not necessarily. The problem arises from brokers not sharing the risks with their clients. Although brokers are tracking the risks involved in the trades, they may not be entirely open with clients about these risks which results in the investor not being informed until they are about to lose their investment. This can be avoided by ensuring that the broker you use offers complete transparency in such matters. With some research you should be able to find a reputable brokerage who will detail all of the risks relating to your investments.
The truth is, options trading is far more profitable than stock trading so even although it my be riskier, for many it is worthwhile. There are many who would say that it is a ‘go big or go home’ type of investment so you may find that you have to risk a fairly large sum to get any sort of return. That is why it is so important to get good advice from a great broker with a very real sense of what is going on in the market.
Options trading is very beneficial to brokers due to the larger rates of commission, and it is a risky investments. However, with that being said no type of trading is a sure thing and the larger returns can make the higher risks worth taking the chance. With some sound advice from a broker or advisor with a good reputation for transparency, you may find that options trading can benefit you both!
Liam Ball is a freelance writer specializing in financial issues. He is a regular contributor to a number of finance blogs including Epsilon Options