Investing and trading are two vital facets of the financial markets. With the increasing adoption of technology, engaging in both these activities has become easier than in earlier days. However, certain factors set apart these two activities. Read this blog to get a better understanding of the issue of ‘Options vs Stocks’.
Investing in stocks is one of the most common ways in which many investors invest their money. Stocks or equity investments refer to purchasing the share of a company. An equity share represents a fractional ownership of a company.
These shares are often traded on the stock exchanges. The value of a stock fluctuates over time and is impacted by various micro- and macro-economic factors. The company’s earnings, profits, and management, among other factors, impact the value and existence of the share. Shares of a company are perpetual, which means the shares exist as long as the company exists.
Options are financial derivative contracts. These contracts derive their value from the underlying assets such as stocks, indices, commodities, and currencies. Options contracts do not have any intrinsic value and expire on a specific date.
An options contract gives the holder the right but not the obligation to buy or sell a security at a predetermined price on a specific date. Call and put options are the primary types of options contracts.
A call option gives the buyer the right to purchase a security at a predetermined price on a specific date. The premium or value of the call option moves in the same direction as the underlying asset. An increase in the price of the underlying asset will lead to an increase in the premium of the call option.
A put option gives the buyer the right but not the obligation to sell a security at a predetermined price on a specific date. The put option’s premium rises with a fall in the value of the underlying asset and vice versa.
In order to better understand Stocks vs. Options, we must look at the pros and cons of both instruments.
Here are the pros and cons that one should be aware of while trading options.
Here are certain factors that you should consider while deciding on the right financial instrument for you.
The primary factor one should consider is the investment goals. Investors should consider what they plan to achieve through their investment activity and how much time are they willing to commit to investing or trading.
The risk appetite of an individual is a crucial factor when choosing between options and stocks. Although stock investments carry high risks, the associated risks with options trading are significantly higher. The volatile nature of options trading may not be suitable for investors and traders with a lower risk appetite.
For investors who are looking to invest for the long term, stocks can be a viable bet. However, options expire on a specific date and are more suitable for short-term trades.
Stock investments are relatively simple which makes it an easy way to invest for many investors. On the other hand options trading is more complex and may require additional efforts to understand and execute.
With the rising popularity of options trading, many market participants are often confused while choosing between options and stocks. While both instruments have the potential to deliver high returns, it is important to compare the risks and other important factors before making a decision.
Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.