What Is the Definition of a Stock Option?

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A stock option is an opportunity to place money with an options trader for a length of time, after which a return on the option payment is received. Learn about low-cost ways of participating in the stock market with help from a registered financial consultant in this free video on investments and personal finance.

Part of the Video Series: Beginner Investing
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Video Transcript

This is financial adviser Patrick Munro, talking about what is the definition of a stock option? An option is a right, but not an obligation, to participate in the performance of a stock in the future. It's almost like an insurance policy, so what you do, is you have an opportunity to place dollars with an options trader, and depending on what you want to achieve, with that particular stock, and the length of time that you want to see it happen in, you can place those dollars with that trader, and when the outcome happens the way you want it, you receive a return on your option payment. However, if the stock turns negative on you, the only thing you've lost is the option premium itself, so it's a low cost way to participate in the stock market, but it's not an obligation to ride down negative trends. This is Patrick Munro, financial adviser, talking about the benefits of stock options.


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