Posted by Mike Smith :: February 27, 2009 @ 5:56 am

Many companies try to capitalize on our fears to sell their products and services. Even unwarranted fears are fair game. A recent advertisement that I saw online provides an excellent example. The ad hoped to capitalize on the fear of your bank going out of business.

The ad promoted OptionsExpress, the online options, stock and futures broker. The copy read “Banks Going Under Are Scary. Options Aren’t.” A “Sorry, We’re CLOSED” sign was shown in the background.

Despite what you may hear on the news or imagine would happen if your bank went under, that prospect shouldn’t invoke fear. Any fear you do feel probably has less to do with the bank’s troubles and much more to do with losing the money you have on deposit there. As I described in my post FDIC Insurance Limits, money on deposit (within the limits described) is protected from bank failure. That means that very few of us have anything to fear from our bank going under.

Now that we know the first part of the ad is false, let’s consider the second half. Note: For those readers new to options, Investopedia describes Options Basics.

As someone who has used options regularly over the past few years, I can tell you that they are very scary. At times they’re the good kind of scary, inspiring the same type of nervous excitement that you might feel on a first date. Often they’re the normal kind of scary, where a feeling of despair quickly wells up inside of you. The same leverage that can bring quick profits can (and in my case often does) bring huge losses in a hurry. Options have their place in the investment world, but they aren’t for everyone and are certainly very scary investment vehicles.

In that sense, the advertisement is wrong in both points it is trying to make. Uninformed investors might conclude that options are a safer investment than depositing money in the bank. This is far from true. When you see an ad that invokes fear, be sure to consider whether that fear is warranted before being persuaded to act as the ad suggests.

Have you made purchases based on fear-inspiring advertisements?