Multiple Choice
How do bond traders typically make money from trading bonds?
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7. Receivables and Investments
Introduction to Investments in Securities
Struggling with Financial Accounting?
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Which of the following is a primary benefit of trading stock options?
A
They provide investors with leverage, allowing control of a larger position with a smaller investment.
B
They eliminate all investment risk associated with the underlying stock.
C
They require no knowledge of the underlying stock's price movements.
D
They guarantee a fixed dividend payment regardless of market conditions.
Verified step by step guidance1
Understand the concept of stock options: Stock options are financial derivatives that give investors the right, but not the obligation, to buy or sell a stock at a predetermined price within a specific time frame.
Analyze the benefits of trading stock options: One primary benefit is leverage, which allows investors to control a larger position with a smaller investment compared to directly purchasing the stock.
Evaluate the incorrect options: Stock options do not eliminate all investment risk, as they are subject to market fluctuations and the underlying stock's price movements.
Consider the knowledge required: Trading stock options requires understanding the underlying stock's price movements and market conditions; it is not a risk-free or knowledge-free investment.
Clarify the dividend aspect: Stock options do not guarantee fixed dividend payments, as dividends are tied to the underlying stock and depend on the company's policies and market conditions.
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