By Daniel Brouse
Investments and Finance 101
- Arbitrage: Arbitrage is a risk free investment strategy. Arbitrage involves at least two simultaneous
trades that result in a profit from a difference in the price. The trade exploits the price differences of a financial instrument.
For instance, purchasing a stock on the London Stock Market (LSE) and at the same time selling it for a higher price on the
New York Stock Exchange (NYSE).
- Interest Arbitrage: Interest arbitrage is a form of arbitrage where you take advantage of differences in
interest rate returns. For instance, borrow money at 0% and put it in an FDIC insured saving account yielding .5%.
- Futures Trading: Futures trading involves buying or selling an option on a financial instrument that may be exercised at a later date.
- Stock Options: Stock options are the buying (call) or selling (put) of stocks in the future. A call gives you the option
to buy a stock at a given price for a given period of time. A put gives you the option
to sell a stock at a given price for a given period of time.
- Covered Calls: Selling a covered call is a risk free investment strategy. For example,
start by buying 100 shares of stock (covering yourself / covered) that trades options. Purchase 100 shares of Archer-Daniels-Midland Company (ADM) at $43. Then,
you can sell a call option for the next six months. The strike price is $47. If the person buying your call wants to exercise the option,
they will pay $47/share resulting in a $400 profit. For the option, they will pay you $1.17/share ($117) today. In any event (whether they execute the option or not),
you get to keep the $117.