There are a couple of options, but two of them stand out.
And you may think lowering your options to two would make it easier for you to choose, but that’s not the case. Comparing them is just like finding the difference between spx and spy.
Allow us to help with our trading options vs stocks comparison. We’ll walk you through all aspects and help you understand which is best for you.
Neither is better than the other when it comes to trading options vs stocks. So, in the end, it’s still your call.
What are Stocks?
Stocks are the most famous form of trading investments out there in the public market. They are well known and seen everywhere, even on your phone widgets.
But what actually are stocks? And how do they help you gain profit? How do stocks work?
Don’t worry; we’ll answer all of your questions for you in this article of trading options vs stocks.
Stocks are shares of a company or corporation open for purchase to the public. Once you put a stock under your name, you will immediately be one of the shareholders of that company.
You may doubt this, especially since stocks aren’t always very expensive. Can you really be a shareholder of Apple? Google?
Yes, of course.
Stocks help you profit through appreciation. This means that the company you invested in has to perform well or generate revenue for you to make any profit.
And if you invest in a good corporation, you’ll even get dividends. These are cash flows that are a bonus along with your profited appreciation.
But these “cheap stocks” you see online are fractional shares, often sold by online brokers or investment apps. They break down shares into small portions to make it affordable to most.
This, of course, should not distract you from the fact that the volume of your share is directly proportional to your profit.
So if you only own a small portion of the stock, you will only get a small portion of the company’s profit.
What are Options?
Now let’s talk about your other options, which are called options, too, ironically.
Options are derivative contracts of another asset.
Now, what does this mean?
It’s not as complex as you think it is. Options are investments whose values are based on an asset. Which could either be a stock, bond, commodity, or currency.
They are still investments, just a safer kind. Due to their derivative characteristics, some traders invest in options to foresee an asset’s future prices.
Options are also a buy-and-sell investment. When you buy an option, it is called a “call option”, and when you sell one, it becomes a “put option”, just trading language.
What makes this type of investment unique is its expiration date. These dates come with the “strike price,” which is the assets’ predetermined price at the moment.
Now, these deadlines are paid for with a fee called “premium”, another addition to your trading language. This premium fee is equivalent to an options contract which lets you purchase shares of a company for a certain price within the stated period.
So if you think a company will generate revenue in the next three months, it would be ideal for you to buy a contract. But if not, you may purchase a put option and sell them for a profitable price.
In trading options vs stocks, options are of higher maintenance.
Differences Between Options and Stocks
Here’s the hard part, choosing between two solid and well-profitable investments.
There are four factors that best differentiate options from stocks. Those are duty, profit, time periods, and safety.
Let us walk you through them in this last part of trading options vs stocks. Hopefully, you’ll measure which is best for you and your investment plans in the end.
Option trading vs stock trading come hand in hand, but one thing they will never agree on is the duty they put in their investors.
As we mentioned earlier, owning stock in a company makes you one of its shareholders. And just from the name, you already know it’s a role you have to be responsible for.
Shareholders have duties to fulfill since they are an actual part of the company. It means that you have the right and power to influence their decisions and views on issues. This, of course, is a serious matter since these decisions will dictate whether the company will generate profit.
On the other hand, investing in an option puts zero responsibility on your name. So no ownership, no dividends, no influence. Just a pure investment.
And now, everyone’s favorite, profit. So, keep on reading…
Stock profits are based on the appraisal. We discussed earlier how your profits come from the company’s generated revenue and how the company must thrive for you to profit.
So this means that stock investments are only profitable when the company’s value increases.
Now, when it comes to options, you profit regardless of the company’s increase or decrease in value. This is because of the underlying security or purchase of a put option.
When it comes to buying options vs stocks, people often run to stocks due to the high and low floats. But it’s an option you need if you’re trying to play it safe.
Time periods don’t really exist in stocks; as long as the company is active, your share is secure. But options have contract expiration dates that may be a problem in the long run.
And the last major difference between stocks and options is the safety you have over the investment.
The reason people opt for stocks is due to the fact that they are safe and long-term. But options are more of a high-risk high reward system, which not everyone is willing to take.
Those are the four factors that set these two investments apart. By now, you should know which trading options vs stocks will work best for you and your plans of investment. But if you still find trouble, you may always try both!