The insurance business has since come a long way.
A slew of insurance companies were formed in England in 1711 during the so-called bubble era. Many of them were fraudulent, get-rich-quick schemes concerned mainly with selling their securities to the public. Regardless, Lloyd's of London was an important player that was made during this time, and it coined the term “underwriting” which comprised shipping information gathered from the docks and other sources, growing into the publication Lloyd’s List, still in existence today.
Many worthy manufacturers were put out of business because the price volatility of raw materials was devastating their operations and finances.
As the Industrial Revolution arrived in the mid-1800s and new forms of transportation, borne from the steam engine technology were introduced to the markets, trade took off. As new players descended on the markets competing to meet market’s demands at the lowest cost, the prices of commodities and raw materials rose. Many worthy manufacturers were put out of business because the price volatility of raw materials was devastating their operations and finances. The speed of supply delivery and people who had access to them exploded.
Futures contracts are, in essence, a guarantee of price for a certain asset or commodity.
Financial markets stepped in with what is today known as Futures Contracts. Futures Contracts guarantee a manufacturer price stability of whatever commodity they are purchasing so that the manufacturer can continue their operations. And if the contract did not follow through with the delivery of the promised commodity, the insurance company would make the manufacturer whole by providing it with the liquidity it needed to last until further shipment was secured. Bakers were able to secure the price of wheat, automobile manufacturers were able to secure the price of steel, cattle ranchers were able to secure the price of livestock. Futures contracts are, in essence, a guarantee of price for a certain asset or commodity.
Similarly, an Options Contract, often traded on Wall Street, is an agreement between two parties to facilitate a potential transaction on an underlying asset (mostly shares of companies) at a present price, referred to as the strike price, prior to or on the expiration date. This is where investors guess the price of an asset, and depending on whether they think it will go up or down, buy a put or call option that gives them the opportunity to buy or sell the asset once it hits a predetermined price (strike price). However, unlike insurance companies, which take an abundance of data when setting premium prices to insure assets despite price fluctuations, many people trading options do not have access to nearly as much information, nor do they know how to analyze that amount of information.
Here are the basic principles we encourage people trading in the options markets to abide by. Look at the ancillary products of the company whose stock price you are looking to bet on, and analyze the strength of its supply chains, its willingness to meet market demand, and the immediate geopolitical risks that could affect either one of these two factors. You will not have access to perfect information; the fact is that no one ever does. However, gathering information from 3 media sources will suffice for you to win more than 50% of the time. If you even out your bets, you will make a considerable amount of money.
