Difference Between Stock vs Options
In the complex world of capital markets, we have found ourselves on crossroads of many financial jargons. Today we are going to simplify the Stocks vs Options debate so that whether you are an employee with options or reader or investor or trader can easily get your head around them.
- Stock: Stocks are the most common tools to invest in the markets for individuals, mutual funds, pension funds, investors etc. Buying a stock literally makes you an owner of the given company for a fraction to the total number of shares outstanding. There are two types of stocks
- Preferred Stock: Preferred stock owners have superior claims on a company’s assets than the common stock owners. They usually come with no voting rights. Dividend payment to them is given more priority than common stock owners and is usually fixed or is aligned with a benchmark like LIBOR.
- Common Stock: They have the ownership of the company and most of the investors have them in their portfolio, most commonly traded on exchanges. They come with ownership benefits like stock bonuses, dividends, shares of the company of its subsidiaries when they are listed.
- Options: Buying an option makes you deal with price, they don’t have any ownership, dividends or any other benefits of the stock owners. Options are usually one of the most preferred instruments used by the fund managers to hedge their exposure or the traders to trade the share price. Options have many key things associated with them like expiry, lot size, option type, volatility etc. Due to their complexity, many times people who can’t actively operate are advised not to use them. Options have two types:
- Call Option: Call Option is the option type which gives you the right, not the obligation to buy the stock of the company at a certain price by paying of the premium. This enables you to participate in the upside growth of the company or the stock price while your downside risk is just the premium paid. This is the option which many senior-level employees get in the form of remuneration to help them be motivated for company’s upside growth potential by issuing them call options.
- Put Option: Put Option is the option which gives the option buyer the right but not the obligation to sell the stock at a certain price. This caps the downside risk for your investment or you can use them to gain will the stocks are going down by trading.
They are commonly used by fund managers to cap off the risk in the market investments by buying the put options
Stock vs Options Infographics
Below is the top 5 difference between Stock vs Options
Key differences between Stock vs Options
Both Stock vs Options are popular choices in the market; let us discuss some of the major Difference Between Stock vs Options:
- Stocks are primarily viewed as investments in business which tend to do well in long term and are therefore invested with for wealth creation like real estate, gold etc. Options are just primarily used as trading instruments used to trade the stock price movements.
- Stocks come with ownership benefits like dividends, stock bonuses, Voting rights. Options come with no benefits for the option holder.
- Stocks when used as invested instruments used for a long-term view with more than 6 to 10 years, Options are more of short terms ranging from a few weeks to months for hedging portfolios.
- Stocks are used by individuals, mutual fund managers, pension fund managers, traders, portfolio managers. Options are limited used by traders and portfolio managers (as hedging tool)
- Options are basically the rights purchased by paying the premium to buy or sell the stock at a certain price where the buyer of the option is not obligated to do the same that is why his downside is limited. Stock buyers are obligated to full downside of the stock.
Head To Head Comparison Between Stock vs Options
As you can see there are many Comparison between Stock vs Options. Let’s look at the top Comparison between Stock vs Options are as follows –
|The basis of Comparison between Stock vs Options||
|Meaning||Buying the stocks comes with ownership in the company||Options are used to book at price to buy or sell stock|
|Benefits||Voting rights, dividends, stock bonuses||No benefits for the option owner|
|Time horizon||Usually long term 6 to 10 years||Usually for short term from weeks to months|
|Risk||The low risk when used with an appropriate time frame||Very risky as all the money used can be turned to 0 very quickly|
|Used by||Individuals, Portfolio investors, mutual funds, pension plan managers||Used limitedly by traders, employees and fund managers.|
Stock vs Options – Final Thoughts
Stocks are used predominantly for investment purposes, come with a lot of upsides as well as the downside, but generally as we have seen stocks in the USA, India has significantly outperformed any other asset class over the long duration for wealth creation. Investing in stocks come with voting rights, dividends eligibility, stock bonuses etc.
But quite oppositely Options are a tool just to have financial benefit or security from the price movement of the stock price. Buying an option for a premium gives you the right to buy or sell the stock at a certain price but you are not obligated to do that so the downside is significantly low. They are usually time bound and so are generally very high risk and might end at zero with no benefits to most of the options owners.
Therefore, seeing the Stocks as predominantly as an investment option is a lot more practical, simple and more benefits whereas the options are complexly priced, trading tool, used for hedging of portfolios or traders to have large exposure to stock price movements.
Buying stocks or options can be done simultaneously they are not mutually exclusive. Trading of stocks is usually easier with low capital requirements as they are less risky whereas trading in options is very risky and so the brokers usually need the full capital in advance as there are chances that the capital might go down to zero.
This has a been a guide to the top difference between Stock vs Options. Here we also discuss the Stock vs Options key differences with infographics, and comparison table. You may also have a look at the following articles to learn more