This article is aimed at showing you how options trading and stock trading are one profit making business having different layers of approaches and different degrees of complexity. In this article, you will be guided to know that trading stock options can be very tasking relative to stock trading.
Stocks and options are like two sides of the same coin; they are related with marked distinctions in terms of reward, risk, size of investment, and investment cycle. This means that stock trading and options trading are dealing with the same investment objectives.
Both options and stock trading are means through which we can invest money and expect handsome rewards. They are both markets for portfolios but with different tendencies for risk and reward.
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Stock trading is a risky venture but this is compensated by its high-reward potential. However, the risk associated with Options trading is bigger than that of Stock trading but it has every tendency to multiply or even triple your investment at the risk of losing everything at a short interval.
If you want to buy a stock, the decision as to number of shares you want to buy must be made before your brokerage can fill the order at either the prevailing market price or a limit order price you may set.
Options trading requires a prior knowledge of technical issues and transaction strategies followed by opening and funding of a trading account.
Distinction Between options and Stock Trading
We will consider some noticeable differences between options and stock trading.
Ownership interest in a business exists in stock trading and, in most of the cases, may trade on an exchange like NASDAQ, NYSE, etc.
Unlimited lifespan is an essential attribute of stock trading. It continues to trade as long as the parent company exists and remains publicly traded. If the parent company goes bankrupt you may lose your share as the stock ceases to exist.
Stock can fluctuate significantly at any given time of the year In any given year, but over time it could get stable with high growth in earnings bringing the business to a rewarding status.
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If the company grows earnings, the stock will rise over time. If its profit falls, the stock will fall. If the company goes bankrupt, the stock may cease to exist.
Ownership does not exist in an option trading. Options is a mere right to purchase a stock at a stated price by a stated time. You must note that stock options trading is done on a public exchange.
An option has a limited, fixed lifespan. Options has a known expiration date beyond which its value is settled among investors and the option ceases to exist.
Options come in two major assortments (Call and Put) and buyers make a cash payment called premium to own the contract.
Call Options: You buy at a specified price until a stated date is reached. Here, the buyer expects the stock price to go up.
Put Options: The owner is allowed to sell the stock at a stated price until a given date is reached. The seller makes profit when the price goes up within the timeframe. However, if you are buying put options, then you must wait until the stock price drops significantly.
Reasons You Should Invest in Stock Trading
Investing your money in stock trading comes with the following advantages:
- Stocks can bring a possible high return on your investment with manageable risk.
- Stocks can be packaged in Exchange- Traded- Funds (ETFs) or mutual funds, providing an easy way to invest in a diversified portfolio and derivatives.
- Stocks have a limitless lifespan such that your investment can continue to exist as long as the parent company remains publicly traded. This means your investment is long term in nature and can be transferred to your estate if you die.
- Stock pays money to you in two ways -dividend and capital appreciation. The best stocks grow their dividends each year and sending a certain percentage your cash reward to your bank account overtime. In the absence of dividend, you can be rich through investment appreciation.
- Major online brokers have removed or reduced trading commissions to zero, so it is very affordable to engage in stock trading.
Reasons You Should Invest in Options
Investing your money in Options trading attracts with the following advantages:
- Options can bring a very high yield on investment at a very short period of time using the power of technical analysis and a bit of providence to multiply or triple the value of investment. With a small sum of investment, the options trader has the likelihood to hit it big at a short time.
- Options has a very high price volatility and this perceived disadvantage is part of what draws traders to the potential benefits of the options trading.
- Options are risky venture but there are strategies that are developed to help minimize risk and if you master options strategies, you will make incredible returns than a stock investor.
- Options are generally risky, but some options strategy can be risky and can even enhance your returns as a stock investor.
- Like stockholders, owners of options can enjoy the potential upside if a stock is acquired at a premium to its value, though they’ll have to own the options at the right time.
- Options portfolio has very high liquidity that you can convert them to cash at any time the market is open but you should expect some deduction in terms of not getting your purchase price.
Between Stock and Options Trading- Your Choice
To invest in stock, you are required to do some analysis and continuous research, but options require even more strategic analysis.
If you want to invest for a long-term target, stocks can be the best investment but sometimes you have to take care of regular dips in price due to volatility. However, the short-term nature of options suggests that it can be tough riding out the fluctuations before your due date is attained.
While stock requires your regular monitoring and assessment, options do not need such continuous monitoring but the options traders have to be up and doing until the fixed date is attained.
Stock gives you a permanent stake as a holder of the company’s asset, but options is a mere contract of less than short-term nature. Some options strategies can enable you to buy at reasonable price. Options trading is a price-informant. An options strategy such as writing-puts allows you to collect a premium for the potential to buy a stock at a lower price.
Exchange-Traded Funds (ETFs) As A Substitute for Stocks
From the above discussions, we are of the view that stocks are the better choice than options. However, the easiest way to buy them is through stock ETFs.
If you are new to the business of stock trading, ETFs will be the best way to start but many advanced investors equally opt for ETFs because of they are less complex.
ETFs allow you to indirectly own a share of stock in the fund. ETFs also allow you to buy a stake in the Standard & Poor’s 500 Index, a collection of hundreds of America’s best publicly traded companies.
Records show that the index has returned an average of approximately 10% annually to investors who have bought and held them.
