These Stocks Aren't for Amatuers

Thinking about getting back into stocks? You probably learned enough from the recent market collapse to steer clear of investments with fancy names like collateralized debt obligations, but there are lots of other risky places to put your money. Unless you know your way around the stock market and enjoy taking on heavy risk, say financial gurus, these investments probably aren’t for you.

One word you’ll hear frequently on business news shows is options. Stock options are contracts that let you buy or sell shares at a designated price. If you think a stock is going down, you can buy a “put” option, which lets you sell shares at a specific price. If you buy a “put” that will let you sell stock at $100 a share, for example, and the stock goes down to $80, you make money by buying the shares at the lower price and selling them at the “put” price. “Calls” give you the right to buy shares at an agreed price. If the stock goes up, you buy at the lower contract price, then sell at the current price. Since the stock often doesn’t get to the assigned price, many options end up being worthless.

Short sellers try to make money when stocks are going down. If you think a stock is heading south, you can sell it short, which is shorthand for borrowing the stock and replacing it later. You win if the stock goes down, since you can replace the borrowed stock at a lower price than what the buyer paid you for it when you sold it short. If the price goes up, though, you’ll pay the higher price to replace the borrowed stock. This is not a strategy for the risk-averse; since the stock can, in theory, go up indefinitely, the potential loss from a short sale is infinite.