Measures like return on equity and return on assets help you understand how efficiently a company allocates its resources, and they allow you to look beyond raw profit numbers. Companies with same earnings figures might have very different returns on equity and returns on assets, depending on how well they have turned their assets into profits.

4. How Healthy Are Its Finances? Earnings and cash flow are two different things. You could earn a very generous salary but still run into cash-flow problems if you get paid only twice a year. Because of quirks in accounting practices, a company’s reported earnings often differ from amount of cash it brings in door. The statement of cash flows, which is part of annual report, will tell you just how much of money a company pocketed.

It’s also important to see how company uses that cash. Digging into cash flow statement to find out where money’s going can shed light on management’s strategy and give you additional insight into company’s future. Is it building aggressively for future by opening new stores or building new manufacturing facilities? Is it buying other firms, paying off debt, building up cash reserves, buying back stock, or paying dividends?

Companies can also issue debt to finance new plants and research efforts or to bail itself out of short term cash problems. Companies need to watch their debt levels, though. Too much borrowing can force company to use its cash to pay interest, instead of applying it to more productive ends.

No hard-and-fast rule will tell you how much debt is appropriate for a particular company, because levels of indebtedness can vary across industries. To get an idea of whether a company is overburdened by debt, divide its assets by its equity. The result is company’s financial leverage.

5. Is It Worth Price? A company might clear all these hurdles, but sell at too high a price to be an attractive investment. It all depends on how much its prospects are worth.

To figure that out, look at its forward Price/earnings ratio, for example General Electric has a forward P/E of 41, which means that shareholders now pay $41 for $1 of company’s future earnings.

Another widely used measure is price/book ratio. That shows how much shareholders are paying for $1 of company’s assets.

Whichever ratio you use, compare it with its parallels for other companies in its industry and for market as a whole. That will tell you how expensive stock is, relatively speaking. Remember, stocks with very high P/E and P/B ratios can fall dramatically when any little thing goes wrong.

Analyzing stocks isn’t easy, but you will be off to a solid start if you ask these questions first before buying a stock.

Options have expiration dates, while stocks do not.

There is not a fixed number of options, as there are with stock shares available.

Stock owners have a share of company, with voting and dividend rights. Options covey no such rights.

There are only two kinds of options: Call Options and Put Options.

Call Option A Call Option is an option to buy a stock at a specific price on or before a certain date. In this way, Call Options are like security deposits. If for example you wanted to rent a certain property, and left a security deposit for it, money would be used to insure that you could, in fact, rent that property at price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability. Call Options usually increase in value as value of underlying instrument increases.

When you buy a Call Option, price you pay for, called option premium, secures your right to buy that certain stock at a specific price, called strike price. If you decide not to use option to buy stock, and you are not obligated to, your only cost is option premium.

Put Option Put Options are options to sell a stock at a specific price on or before a certain date. In this way Put Options are like insurance policies.

If you buy a new car, and then buy auto insurance on car, you pay a premium and are, hence, protected if asset is damaged in an accident. If this happens, you can use your insurance policy to regain insured value of car. In this way, Put Option gains in value as value of underlying instrument decreases. If all goes well and insurance is not needed, insurance company keeps your premium in return for taking on risk.

With a Put Option, you can “insure” a stock by fixing a selling price. If something happens which causes stock price to fall, and thus “damages” your asset, you can exercise your option and sell it at its “insured” price level.

If price of your stock goes up and there is no “damage,” then you do not need to use insurance, and once again, your only cost is premium. This is primary function of listed option, to allow investors ways to manage risk.

Hopefully this brief insight into Options gave your enough information for you to be able to decide whether or not Options are something you would like to learn more about.