In the most recent post on the Stock market basics guide website, it was pointed out that an alternative to buying stocks would be to buy shares in an Exchange Traded Fund (ETF). In that post, reference was made to ETF’s of the major stock exchanges, the DOW, the NASDAQ, and the S&P. Specifically featured was the Nasdaq ETF know as the Q’s – symbol QQQ for which examples and charts were shown.

The QQQ ETF was chosen because it was the least costly of the 3 index ETF’s. At the end of the previous article it was mentioned that an explanation would be provided on other ways to trade QQQ that could provide a bigger return on dollars invested.

There are two ways that can be accomplished, both of which carry somewhat higher risk. But the returns, if achieved, are sufficiently high to warrant the risk. The key to making gains in trading is to be able to correctly forecast the direction of the price change of the underlying stock issue concerned, in this case the Nasdaq exchange and its ETF, for which we have assumed that the market will continue upward.

The two alternatives to buying stocks or ETFs

Alternative 1: Buy QQQ Calls.
A Call is an option to purchase shares of an underlying stock issue, in this case the QQQ trust fund. They are easily traded in the same way as shares, usually with the same stockbroker. The price of the option is established at the time of trading via the normal bid and ask process and specifies an exact price at which the option can be exercised at a later date, called the Strike Price, within a specified time period. A winning option position normally provides much higher gains in terms of percentages than the gain achieved by the underlying stock. The total dollar amount at risk can be significantly less than the amount required when buying stocks.

Like any trade in the stock market, sometimes the underlying stock and the option may not perform as expected, their values may decline as time passes — the stock loses money which makes it unprofitable to exercise the option – but it is not necessary to exercise the option, many options expire without being exercised and usually expire worthless or valued at less than the cost of a stockbroker’s transaction fee.

Stock options basics are explained in several other articles on this Stock Market Basics website. For instance, see Trading Options for the Beginner.

Alternative 2: Buy shares of the QLD — ProShares Ultra QQQ
The ProShares Ultra QQQ is a “leveraged” alternative ETF fund that has the objective of doubling the daily return, making at least two-times the daily gain of the QQQ fund. More expensive than the QQQ but it’s the ROI (Return on Investment) that is important

Learn more about ProShares here.

To track and compare the future results, starting yesterday July 7, 2011:

The QQQ closed yesterday at $59.19 with a day’s gain per share of 80 cent (1.3%)

The QLD closed yesterday at $95.20 with a day’s gain per share of $2.67 (2.89%)

When the QQQ makes a loss for the day, the QLD will make a greater loss for the day.

Options on the QLD fund can also be bought in the same way as options for the QQQ – another way of leveraging the trade for a possible greater return.

Suggestion: Learn about options as an alternative to buying shares
It is recommended that beginning traders, who are wishing to learn the basics of stock market trading, should spend some time learning how to trade in options as an alternative to buying shares in a company. A paper-trading test exercise to compare the results can be made by buying both shares and options at the same time and tracking the results – but a warning: to lower risks, it is necessary to follow specific guidelines suggested elsewhere on the Stock Market Basics website, see the link given above, and also see: Four Rules for Trading Stock Options.


Related posts:

  1. For the Small Trader, An Alternative to Buying Stocks
  2. A Case for Buying Options Instead of Buying Stocks
  3. The Stock Chart and a Simulated Trade to Buy Shares and Options of AGCO
  4. Buying Stocks or Buying an ETF (Exchange Traded Fund)
  5. Trading Options with an added “twist” to the basic strategy
  6. Trading Options for the Beginner
  7. Buy the Stock or Buy the Option? Risks and Rewards in Trading Options

Filed under: Stock Market Basics

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