Option

Options give you the right to buy (or sell) a security at a specific price on or by a certain date. You're not locked into buying or selling, though—hence, option.

Options come in lots of flavors (employee stock options and naked options, to name two), but the important thing to remember is that they don't give you the same benefits as actual stocks. You won't get dividends or voting rights with options—just the right to buy (or sell) stocks later on. You can trade options just like other investments, though, if people want 'em.

Example

A stock you're interested in is selling at $100 a share. You want to buy 1,000 shares of the stock but don’t have $100,000 to pony up. So you buy the option to buy within the month for $110,000 for 1,000 shares (the extra $10,000 is because the stock might go up in price). You pay $5,000 for the right to do that.

In a month's time, if 1,000 shares of stock are worth $170,000, you have a great deal. You can buy 1,000 shares for $110,000 ($115,000 with the $5G you spent on the option). If the stock drops in value and 1,000 shares are now worth $60,000, you don’t have to buy. You're not locked in. So you've lost $5,000 that you paid for the option, but you've saved a lot of headache.