Options trading and stocks are two ways to put money to work in the market, but they have very different risk and reward profiles. Stocks have high-risk, high-reward potential, but options take it a step further, with the potential to double or triple your money at the risk of losing it all in a matter of weeks or months. Stocks and options are closely related, but they are very different in terms of how much money you can make or lose. A stock is an ownership interest in a company that can be traded on an exchange.
A stock has an indefinite life and trades for as long as a company exists and is publicly traded. A stock can fluctuate significantly in any given year, but its performance should track the growth of the business over time. If the company’s earnings increase, the stock price will rise over time. If its profit falls, so will the stock. If the company fails, the stock may cease to exist. An option is the right to purchase a stock (or other asset) at a predetermined price and at a predetermined time. On a public exchange, stock options are traded. An option has a set life and an expiration date, after which its value is settled among investors and the option ceases to exist. All else being equal, the value of an option tends to decline over time, making it a wasting asset.
Benefits of Options Trading:
Options can provide very high returns in a very short period of time by leveraging a relatively small sum of money into many times its value.
Whilestock prices in Indiaare volatile, option prices can be even more volatile, which is one of the reasons traders are drawn to the potential gains from them.
Options are generally risky, but certain options strategies can be low risk and even improve your returns as a stock investor.
Owners of options, like stockholders, can benefit from the potential upside if a stock is purchased at a premium to its value, but they must do so at the right time.
Options commissions have been reduced by major online brokers, and a few brokers even allow you to trade options for free.
Options are liquid in the sense that they can be exchanged for cash at any time the market is open, though there is no guarantee that you will receive the amount you paid for them.
Longer-term options (those held for at least a year) may qualify for lower long-term capital gains tax rates, though they are not available on all stocks.
Benefits of Stocks:
If you invest in a diversified portfolio of stocks, such as an index fund based on the Standard & Poor’s 500 Index, stocks can provide potentially high returns with low risk.
Stocks have a potentially infinite lifespan because the stock can exist as long as the company exists.
Dividends can be paid by stocks, and the best stocks in share market increase their dividends year after year, putting more money in your pocket over time.
A company may be acquired at a significant premium to its market value, rewarding stockholders.
Stocks that are publicly traded are extremely liquid, and you can exchange them for cash on any day the market is open.
You get to enjoy a potential tax break for long-term stock investing by lowering the maximum capital gains tax rates if you hold an investment for more than a year.
Stocks can be packaged in exchange-traded funds (ETFs) or mutual funds, making it simple to invest in a diverse portfolio at a low cost.
The choice of investment is always subjective to an individual. The article has listed out the benefits of both Options and stocks. It’s upto the discretion of the trader to choose the security they are going to trade in. Tradeplus in no way advocates the supremacy of one security over the other.