Shares: a careful approach

Got shares? Feeling nervous? It can be a rocky ride at times but here are some old school methods for covering your butt.

If you are an investor, the share market can be one of the biggest gambles – prices rise and fall and the stock market seems to have a life of its own. If the prices are falling the first principle is: don’t panic, and, like any good rider, grab the reins tightly. History has shown that as a general rule it is better to hold your shares and hope the field does not get away from you.

Using call options

That piece of advice may not be enough for some. Be reassured that there are measures you can take to protect yourself, and one of the best is to establish an options strategy. Options can reduce the amount the share price must recover before the investor breaks even on the stockholding. In layman’s terms, having options can mean the share price does not need to return the purchase price for the investor to quit the stock without a loss.

It is worth your while reading up on options if you are looking to protect your share portfolio or enter the share market at a volatile time. The ASX
is the best place to begin.

A call option allows you to buy a parcel of 1000 shares at an agreed price - the new lower trading price - within a set timeframe (that is before the call option expires). It can get complicated.

The best-case scenario is employing an options strategy where gains on one cancel out your original losses at the initial higher purchase price. Occasionally you may even be able to make a profit.

Remember, however, the purpose of options is to reduce your potential losses on your shares.

If you want to get really involved, derivatives are another financial instrument that can help you profit when the market is either trading up or down.