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======================== THE MOTLEY FOOL ======================== INVESTING BASICS Tuesday, November 20, 2001 rshapiro@enron.com ================================================================= IN THIS ISSUE --------------------- - Q&A: Is Insider Selling Significant? - Q&A: What Does "Insured by FDIC" Mean? - LESSON: Options 101 ================================================================= SPONSORED BY: Ameritrade Ameritrade brings you the market's most valuable commodity: Knowledge. Get a free 6-month Morningstar.com Premium Membership when you open an account. http://www.ameritrade.com/o.cgi?a=xbx&;o=rkg&p=/html/mstar.fhtml ================================================================= YOUR QUESTIONS ANSWERED Q. Should an investor be concerned if one or more officers of a company sell shares of its stock that they own? A. Although it may look like a red flag, it isn't necessarily one. Many executives today receive a large part of their compensation in stock options. So when they have to buy a house or make a college tuition payment, they sell some shares. They may also be trying to diversify their investments, not wanting to have too much of their portfolio in one company. On the other hand, one insider (or many insiders) selling might indeed signal a loss of faith in the company. If you're worried, you might want to take a closer look at the company's recent performance. Perhaps fire up your computer and see what people interested in the company are saying about it online, on message boards. Q. What does "insured by FDIC" mean, and what does it NOT insure? A. The Federal Deposit Insurance Corp. (FDIC) insures our traditional checking, savings and money market accounts (as well as CDs) held at banks and thrifts for up to $100,000. Note, though, that the FDIC does not cover stocks, bonds, mutual funds, life insurance policies, annuities and the like. For these, check with your financial service company to see what kind of insurance may be provided. Learn more about the FDIC at their website. To make sure you are stashing your short-term cash in the most profitable place, check out our Savings Center. http://www.fdic.gov/ http://www.fool.com/savings/savings.htm ----------------------------------------------------------------- THIS WEEK'S LESSON OPTIONS 101 Imagine you want to invest in Legume Gas Works (ticker: BEANZ). You can buy shares the usual way -- or you can buy options. Here's an introduction to options. There are two main types: calls and puts. A call gives you the right to buy a set amount of shares at a set price within a certain period of time (often just a few months). For this right, you pay a price premium. Puts are similar, but give you the right to sell shares. If Legume is selling for $50 per share and you expect it to rise, you could buy "October $55" call options for it. Let's say you snap up calls to buy 100 shares, for $6 each, or a total of $600. If just before your options expire Legume is selling for $65 per share, you can exercise your options and buy 100 shares for $5,500. Then you can keep them or sell them for $6,500. If you sell, you make a $1,000 profit, right? Nope. You paid $600, remember? So your profit is down to $400 -- less, when you account for trading commissions. Options are risky. If Legume stays at $55 or falls, your $600 would be entirely lost. It has to top $61 per share -- $55 plus $6 -- by October for you to profit. Some folks like options because of the leverage they offer. They point out that if you only have $1,000, you can only buy 20 shares of a $50 stock. Alternatively, that $1,000 could buy many more options tied to hundreds of shares of stock. True enough. With options, though, timing is critical. If things don't go your way in a short-term time frame, your option will expire worthless. Most options expire unexercised and worthless. (Those most likely to profit from options are the ones who "write" or sell the options.) That's because options are really about buying time, not stocks. If you're sure that Legume's stock will rise, you're probably best off buying its stock. Then if it doesn't behave as you expected it to, you can either sell the shares or hang on patiently. Options are not for beginning investors, and even more advanced investors might consider steering clear. You can read more about options at this Motley Fool FAQ. http://www.fool.com/FoolFAQ/foolfaq0055.htm ================================================================= SPONSORED BY: Ameritrade Ameritrade brings you the market's most valuable commodity: Knowledge. Get a free 6-month Morningstar.com Premium Membership when you open an account. http://www.ameritrade.com/o.cgi?a=xbx&;o=rkg&p=/html/mstar.fhtml ================================================================= My Portfolio: http://quote.fool.com/portfolios My Discussion Boards: http://boards.fool.com/favoriteboards.asp WANNA TAKE THE SHORTCUT? Check out our new Crash Courses, the fastest way to get your finances in order. Get results in less than an hour, for just $10. Try one today! http://www.fool.com/seminars/ccportal.htm?ref=em_ibtxt PERKS FOR FOOLS ONLY Get free stuff and special offers, just for you! http://www.fool.com/community/mbc/mbc.asp?source=emibtxt CUSTOMER SERVICE Ask our staff for help with email delivery problems. http://boards.fool.com/messages.asp?id=1010026000000000 UNSUBSCRIBE Here's how to unsubscribe or change your settings. http://www.fool.com/community/freemail/freemaillogin.asp?email=rshapiro@enron.com _________________________________________________________________ Copyright © 1995-2001 The Motley Fool. All rights reserved. Legal Information: http://www.fool.com/help/FoolMarks.htm MsgId: msg-9745-2001-11-20_16-50-04-6060412_5_Plain_MessageAddress.msg-16:51:11(11-20-2001) X-Version: mailer-sender-master,v 1.84 X-Version: mailer-sender-daemon,v 1.84 Message-Recipient: rshapiro@enron.com
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