How to Successfully Trade Stock Options in Ten Easy Steps - Step 8

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Hello again, we are now up to week number eight in the ten part article series on how to trade stock options successfully. Stay tuned for this weeks installment on how to save.

Savigs is one of the most critical parts to any successfuly financial strategy; if you spend your gains as soon as you have them you will never reach true wealth. It is only by the miracle of compound interest that your gains will truly turn into a fortune.

Compound interest is the process whereby annual returns are added to the original investment and reinvested, rather than being spent or taken out, thereby creating a larger amount to invest again, as this process is repeated the compounding exponentially increases the returns over the lifetime of the investment. For example if you invest $10,000 a 20% return increases your portfolio to $12,000. A 20% return on that increases your portfolio to $14,400, 20% on that is $17,280, 20% on that is $20,736 and 20% on that is $24,883 which is a total return of $14,883.

Now assume as soon as you made the original 20% return you took it out and spent it, your next 20% return would only be the same $2000 on your $10,000 investment. If you consistently got the same return as above and kept taking your money out your total return would be $10,000 or $4883 (50%) LESS than if you had kept saving your money and reinvesting it. The longer you leave your money in your account the more pronounced your returns will be and the greater the effects of compounding will be.

Einstein once said "Compound interest is the 8th wonder of the world". When applied to options trading we can replace the word "interest" with "return on investment". That means if you are winning and have a good return on your investment don't take out the profits in your account to spend on a new boat, car or house. Re-invest your profits and if you are doing everything correctly the miracle of compounding returns will exponentially increase the size of your portfolio.

This is only a short article this week. Next week we have a lot to discuss when we talk about money management.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Article Source: http://depositarticles.com/

Roger Cox, born in New Zealand, was President of a large international freight company in Los Angeles before starting his own consulting firm. Roger has been successfully trading stock options for 4 years and teaches others how to do the same at www.prosperitywithoptions.com

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