Difference Between Stock vs Options
Stock is the most common tool 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. Options make you deal with a 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.
Types of Stock:
- 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.
Types of Option
- Call Option: Call Option is the option type that gives you the right, not the obligation, to buy the stock of the company at a certain price by paying off 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 a company’s upside growth potential by issuing them call options.
- Put Option: The Put Option is the option that 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.
Head To Head Comparison Between Stock vs Options (Infographics)
Below is the top 5 difference between Stock vs Options
Key differences between Stock vs Options
Both Stocks vs Options are popular choices in the market; let us discuss some of the major Difference :
- Stocks are primarily viewed as investments in business that tend to do well in the 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 tools)
- 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 the full downside of the stock.
Stock vs Options Comparison Table
As you can see, there are many Comparisons between Stock vs Options. Let’s look at the top Comparison between Stock vs Options are as follows –
|The basis of Comparison||
|Meaning||Buying the stocks comes with ownership in the company||Options are used to book at a 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.|
Stocks are used predominantly for investment purposes, come with a lot of upsides as well as downsides, 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 comes 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 an investment option is a lot more practical, simple and more benefits whereas the options are complexly priced trading tools used for hedging 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 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.