Stock Trading vs. Options Trading: What’s The Difference?

Ever wondered about the difference between options vs stocks? It’s like comparing apples to oranges in the stock market world!

Stocks are like owning a piece of a company – the easiest and most common way to invest money. Meanwhile, options offer a different game plan – buying options can help you reduce the downside exposure of your portfolio while making attractive returns with little capital.

But, traders are often confused between stock trading vs. options trading – not knowing which is better?

So, stick around!

In this blog, we will discuss the brief overview of trading options vs stocks, and how they differ.

What Are Stocks?

What Are Stocks?

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When you buy stocks, you become a part-owner of a company traded on the stock market. If that company does well, and its stock becomes more valuable, you benefit from its success. Some companies even pay you a part of their profits, called dividends, giving you extra cash along with the value increase.

With investment apps or brokers, investing with small amounts, getting into stocks is quite easy nowadays. You can even buy tiny pieces of stock, known as fractional shares.

And the best part?

Many brokers don’t charge you any fees for buying or selling stocks.

People often see stocks as a good way to invest for the long term. Even though prices might go up and down in the short run, the stock market generally moves upwards over a long time. On average, stocks have given about a 10% return each year, or around 6% to 7%, after considering the increase in living costs.

But here’s the thing – stocks can be a bit risky in the short term. That’s why it’s smart to invest in them if you’re planning for something five years or more down the road.

Some traders try to make quick money by buying and selling stocks frequently, known as day trading. But, let me tell you, it’s like trying to predict the market – super tricky. Successful day traders need to know exactly when to enter and exit the market, and that’s not easy to do every time.

If you’re into day trading, be ready to keep a constant eye on stock prices and be quick to react. On the other hand, long-term investing is way simpler. You just need to check in every now and then to make sure your investments are on track.

Read Also: Forex Trading vs Stocks Trading – Which is Better?

Advantages and Disadvantages of Stocks

Advantages

  • Long-Term Growth – Investing in stocks can lead to long-term growth, with the stock market averaging a 6% to 7% real return.
  • Easy-to-Understand – Stocks are pretty straightforward, unlike other assets. Understanding how they work is not too complicated.
  • Simple to Buy – Starting to invest in stocks is easy. You can buy even small parts of a stock (called fractional shares), and many platforms don’t charge any fees for buying or selling stocks.

Disadvantages

  • Risky Asset Class – Investing in individual stocks can be risky. If the company you invested in doesn’t do well, the value of your stock can go down.
  • Due Diligence Required – Before diving into the stock market, you need to put in time and effort to learn. It’s not just about stocks in general; you should also thoroughly research each company’s stock you plan to buy.
  • Ongoing Portfolio Maintenance – Your stock investments need regular attention. You have to keep an eye on them to make sure they’re helping you reach your goals. This means selling off stocks that aren’t doing well and finding new ones, which is an ongoing job.

What Are Options?

What Are Options?

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Options are referred to as special contracts because their value depends on a stock, bond, commodity, or currency. Traders use options to guess where the prices of assets might go in the future.

These Options contracts give you a choice to buy or sell assets at a fixed price, known as the strike price, within a specific time. But it’s not free—you pay a fee called a premium to get these options contracts.

There are two types of options –

  • An option to buy stock is known as a call option 
  • An option to sell stock is known as a put option.

Unlike stocks, options have an expiration date, meaning they become useless after a certain time, which can be a week or even years. While you can keep a stock for a long time, options have a time limit.

Options need more attention and study than stocks. You have to watch the prices of the things they’re based on to know when to use the option before it’s too late.

But be careful! Options can be sneaky and expensive. If you aren’t making money with them, those premiums you pay for each new contract can really eat into your profits. So, while options can be powerful, they need extra caution and understanding.

Advantages and Disadvantages of Options

Advantages

  • Easy Leverage – Options offer a simple way to use a small amount of money for a big return. It’s like making a small bet with the potential for a large win.
  • Hedge Your Bets – If you own stocks, options can act like a safety net. They help protect your stock investments from potential losses in the future.
  • Inexpensive Speculation – Want to guess where a stock is heading without actually owning it? Options let you do that at a lower cost than buying the stock itself.

Disadvantages

  • Very High Risk – While options can bring big rewards, they come with a high risk. Using options can make it easier to lose your entire investment.
  • Short-Term Exposure – Options contracts don’t stick around forever; most expire in just days or months. If your options plan isn’t solid, the costs can pile up quickly.
  • Require Lots of Attention – Unlike stocks, options demand constant attention. You need to keep a close eye on them and manage your portfolio regularly.

Difference Between Trading Options vs Stocks

Difference Between Trading Options vs Stocks

Source:projectfinance

Let’s take a closer look at the key points to truly understand stock trading vs. options trading –

Options TradingStock Trading
Right to Buy or SellYou get the right to buy or sell stocks within a fixed time frame.Buying stocks means becoming a part owner of a company.
Risk and ControlOffers fewer risks and more control over your money.Can be risky when dealing with market fluctuations and volatility.
LifespanOptions have a limited shelf life; the value is determined once it reaches the expiry date.The lifespan of stocks in your portfolio is determined by you; you can sell quickly or keep them for a longer period.
DividendsYou don’t receive dividends on options.You receive dividends on your stocks.
Capital RequirementInitial capital requirement is much less than full stock priceInitial capital requirement is usually equal to the stock price
ComplexityHighly complex, suited for sophisticated investorsLow complexity, suitable for beginner investors 

Stock Trading vs. Options Trading – Which Is Better For You?

When Options Are Better

  • Risk Limitation – Options are the best when limiting your risk. They offer a stock-like return with less investment, limiting your risk within certain bounds.
  • Advanced Investing – For advanced investors who understand the risks, options can be a strategic choice. Seasoned investors know how to manage risks with different options strategies.
  • Better Prices – Certain options strategies can let you buy stock at more favorable prices, giving you an edge in the market.
  • Higher Returns – Options provide a chance for much higher returns, but be cautious – a wrong move could result in a complete loss.
  • Income Generation – Options offer ways to generate income. Selling call options or writing put options against stock positions can be attractive, low-risk methods for income generation.

Read More: Swing Trading vs Long Term Investing: Which is Better?

When Stocks are Better

  • Experience Level – Stocks are a good choice if you have some market experience, but options demand even more know-how. Beginners and intermediate investors often find ETFs or mutual funds with stocks a better fit.
  • Long-Term Investment – If you’re thinking long-term, stocks are your go-to. While they can go through ups and downs, options, with their short-term nature, might expire before your stock takes a favorable turn.
  • Market Monitoring – If you prefer a more relaxed approach to market monitoring, stocks are less demanding than options with fixed expiration dates.
  • Volatility – If a stock is volatile, but you believe in its long-term potential, stocks are the safer bet. Options can become worthless if the stock’s swings don’t align with the option’s time frame.

Making The Decision – Options vs Stocks

Deciding between Stock Trading vs. Options Trading depends on your personal investing style. If you’re a beginner or prefer simplicity, stocks might be your go-to because they are straightforward. 

Conversely, those who like an active approach and enjoy monitoring the market might lean towards options.

However, you’re not confined to just one. Options traders can become stock investors when they practice call options, and stock traders often use put options for hedging. Regardless of your choice, learning before diving into trading options vs stocks is essential.

For those eager to learn about stock market trading, Upmarket Academy is the best Stock Market Academy, offering valuable insights and training to navigate the trading world, be it options vs stocks. It offers basic to advanced trading knowledge through free courses, interactive live sessions, webinars, workshops, and more.

So, doing any of these, if you wish to make profits or prefer the stability of long-term growth, always remember that knowledge is your best friend in the stock market.

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