Hey everyone! Welcome to TriptoInvest. If you are looking forward to investing in the stock market, you have two choices: Stocks and Options. Depending on your investment strategy, you can select any one of them. This article will cover all about the stocks and options. The difference between the two and which is better for you. Let’s begin.
If you invest in stocks you get partial ownership in the company. It remains with you until you sell that stock. Your stock performance depends on public sentiment and the company’s financial health. Stock investment attracts beginners and long-term investors.
Unlike stocks, you can trade in options for a defined period only. Options are buying stocks at a specific price and within a specified time. Options are appealing to active traders who want flexibility.
Now let us discuss in detail the stocks and options. What makes stocks and options different from each other?
What are Stocks?
A stock represents a security of your fractional ownership in a company. The life of stock is not defined. It exists as long as the company exists. In a given time, the value of the stock fluctuates. The performance of stocks tracks the growth of the company.
The stock prices rise over time if the company grows. And the stock prices fall if the company suffers losses. The stock ceases to exist if the company goes bankrupt.
What are the Options?
An Option is referred to as the right that allows you to buy a stock or other asset. Options are for specific periods and specified prices. You can trade stock options on a public exchange.
An option comes with a fixed life. It has an expiration date after which the option ceases to exist and its value is settled among investors. Over time, the value of the option declines. That’s why some investors consider it a waste asset.
There are two major varieties of options. To own an option contract, buyers have to make a cash payment called a premium.
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- Call options – In call options owners can buy an underlying stock at a defined price until a specific date. The call option increases in value if the stock price increases, all else same. Generally, the stock price is expected to increase if you are buying a call option.
- Put options – In put options, owners can sell an underlying stock at a defined price until a specific period. The put option grows its value if the stock price decreases, all else same. Generally, the stock price is expected to decrease if you are buying a put option.
Some of the key differences between stocks and options are summarized in the table below:
| Category | Stock | Any time the market is open. |
|---|---|---|
| Who can benefit | It’s a good choice for beginners and long-term investors. | It’s a good choice for active traders who are seeking flexibility. |
| Drawbacks | It comes with risks, fees, and taxes. | It requires effort, additional risk, and cost. |
| Type of investment | Equity | Derivative |
| Lifetime | It comes with an unlimited lifetime. | Its lifetime is limited. It can be weeks, or months but not more than two years. |
| Brokerage commissions | No brokerage commissions. | It involves brokerage commissions. Some brokers don’t charge commissions. |
| Trading time | Any time the market is open. | Any time if the market is open. |
| Tax | The tax depends on the holding period. | The tax depends on the holding period. |
The Pros and Cons of stocks
PROS
1. Stock markets are government-authorized: The stock market is regulated by the Securities and Exchange Board of India (SEBI). SEBI strictly monitors participants like brokers, sub-brokers, advisors, and stock exchanges to safeguard the interests of stockholders.
2. Chances of good profit in a long time: You always stand a good chance to earn huge profits when you decide to invest in the stock market. Although you put yourself at a lot of risk you are also in a state of earning good returns in a very short time. You have to be patient to witness the growth of your investment.
3. Ownership in a company: When you buy shares of a company’s stock, you take an ownership stake in the business. It is one of the easiest ways to become a minority owner within a company.
CONS
1. High risks and volatility: Stock markets are known for their unpredictability. Prices fluctuate rapidly based on companies’ policies, performance, and global crisis.
2. Requires time and knowledge: Investing in stock requires a substantial amount of time and knowledge. You need to research and analyze individual stocks or take help from financial experts.
3. High brokerage and low margin: Brokers demand huge amounts of brokerage fees, which often reduces investors’ profit margins and detracts investors from the appeal of investment options. Brokers are still required for the market to operate smoothly.
The pros and cons of options
PROS
1. High returns: Options can offer very high returns in a very short period. With the power of leverage, options can multiply a small amount of money into many times.
2. High volatility: Options are highly volatile. Even more than the stocks. This draws traders’ potential gains from them.
3. Risk: Options come with risks. But some options have low risks too. It can enhance your returns as an investor.
4. Potential upside: Option owners also get the benefit of potential upside. If the stockholders own the options at the right time and the stock is acquired at a premium to its value, they can enjoy the potential upsides.
5. Low commissions: Brokers have reduced online brokerage commissions. Some brokers offer the advantage of trading options at no cost.
6. Liquidity: Liquidity in options means you can exchange them for cash. This can be done at any time when the market is active. But there is no guarantee that you will receive the same you paid for.
CONS
1. Valid for a specified period: Your investment thesis should be right. It also has to be correct in the right duration of time. After an option expires, the stock’s increased stock value has no meaning.
2. Risks: According to SEBI, around 80% of traders are in loss. So you are prone to losing money on them. It depends on how you utilize options, you may lose more money than you invest.
3. Short-term– Options are for the short term. Their price varies with the price of the underlying stocks. So you can say that the option is a derivative of the stock. When options expire, the chance to trade in them is over. Traders can not buy and hold options for longer durations as in stocks.
4. Complexity: The derivative market is complex and requires a good understanding of market dynamics and risk management skills. A person needs to be very good at technical analysis and price chart reading.
What to choose between Stocks and Options?
You should choose stocks when you are a beginner in investing. If you do not have any experience in trading or you don’t have enough knowledge of investment, stocks are a good choice.
Stocks are a better option for investors seeking long-term investment. And also if you don’t wish to follow the market trend too much, you can go for stocks. The stocks are volatile. They give you a permanent stake even though you will have to face price fluctuations.
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If you are considering the risk factor, you can go for Options. They are a better choice if you want to limit the risk in investment. Also if you are an advanced and experienced investor, option can be a good choice for you. Some options allow you to buy stocks at much better prices. It can enhance your overall return.
With options, you can increase your money at a much better rate. But it also has potential risks involved. You can also generate income with options. There are some attractive strategies you can use in options.
Conclusion
Stocks and Options come with various risks and returns. Investors need to understand the strategies and tactics of investment before getting involved in them. Stocks are risky but options can be even more riskier. It’s important to analyze the advantages and disadvantages of both stocks and options before making any decision. Good luck with your investment!
