Options vs Stocks, for your investment portfolio.
For Investors, there are many investment opportunities to choose from including Stocks, Bonds, Mutual Funds, Commodities and ETFs. We will explore some differences between Options Trading vs Stocks, some characteristics of both and discuss how they can compliment each other and play an important role in the performance of your investment portfolio. When deciding between options and stocks, Investors and traders must consider factors such as their age, investment knowledge, investment style, time horizon, and investment objectives in determining which investment strategy is more suitable for them.
Buying Options vs Stocks
New investors or those with a more long-term objective may view stock trading, as a more attractive and easily understood investment option. Stocks have a shorter learning curve than Options which explains why less experienced investors tend to gravitate towards stocks to start. If you’re looking for a straightforward way to start saving towards a goal or towards your retirement etc., investing in stocks could be a great idea. However, trading options can also be very beneficial once understood and utilised with the right strategies.
Stocks vs options explained
- A stock gives you part ownership in a company, while an option doesn’t. Options are contracts giving you the right to buy or sell a stock at a specific price at a specific date.
- Options are contracts that expire, whereas stocks don’t have expiration dates and you can hold them for as long as you want.
- Options are considered to me more of a trading instrument whereas Stocks are considered more as an investment instrument.
- Options traders/investors are typically less interested in the long-term direction or value of a stock whereas Stock traders/investors believe or are hopeful that over the long-term, the value of their stock will rise as the company grows or becomes more valuable.
- Options are more conducive to short-term trading, hedging, while stocks are more conducive to longer-term ownership, investing for the future with expectations of growth and stock price increase over time.
- Stocks allow for a somewhat more hands-off investment approach whereas with options trading you must be more actively and strategically involved. You can buy a stock and hold for days, months, years or even decades, the choice is yours.
Investing in Stocks
Buying or selling a stock is a simple and straightforward process which is why new investors tend to start there before venturing into options trading. Before investing in stocks, you need to do your proper research to find the value stocks that you believe have growth potential that also fits your overall investment objective, risk tolerance and time horizon. After you have found a stock that you like, you can work with a broker to buy that stock for you or you can purchase on your own via a self-directed brokerage account.
Investors realize gains or earn income from either stock price appreciation or from dividends that are paid out. If an investor is looking for dividend income, they should explore blue chip stocks which are stocks of well known and well-established companies. These stocks tend to demonstrate stable earnings, are more secure and typically pay out dividends to their shareholders.
While stocks are a great investment option, they are also risky, and you could potentially lose all your money in the event of an economic downturn or stock market crash. However, over the long-term stocks have been proven to outperform all the other major asset classes. As such having a portion of your portfolio in the stock market is recommended especially if you have a long-term investment objective. It’s wise to avoid putting all your investments in to one stock and instead you should diversify across different types of stocks, and across different industries
You may choose to buy options which enables you to bet on whether a stock is going up or down.
Options provide more flexibility and are very useful especially for more seasoned investors or active traders. Options traders are typically less interested in the long-term direction of a stock and are instead betting on its price movement within a certain time period. Options are essentially contracts giving you the right to buy or sell the stock at a specific price on a specific date.
There are two types of Options 1. Call Options and 2. Put Options.
A call option gives the buyer the right but not the obligation to purchase a stock at a specified price (strike price).
If at expiry the price of the stock is below the strike price of the call, the option would be worth $0, and you would lose the amount you spent on the option. If the stock price is above the strike price at expiration, the call option will have value. If the option is worth more at expiry than you paid for it, you will realize a profit.
A put option gives the buyer the right but not the obligation to sell the stock at a specified price at expiry.
If at expiration the stock price is below the strike price, the option will have value. You will realise a profit if the price of the option is more than you paid for it. If the stock price is above the strike price of the put option at expiration, the option will be worth $0 and you will lose the amount of money you paid for the option. Investors will buy put options with the expectation of a fall in the stock price.
One options contract represents 100 shares of the underlying stock.
With options, the investment time period is typically shorter, which is very appealing for traders who want to trade frequently.
Options trading is not as complicated as it may seem and with the right training, tools and trading strategy you could be placing options trades in no time. It’s very important that options traders, especially less experienced traders take the time to learn the basics of options trading, and implement some basic options trading strategies to help them succeed and achieve their trading goals. There are also many great options trading courses and resources out there to help you.
Deciding between options vs stocks
Deciding whether its best to invest in stocks or options is a personal choice, based on your investing style, time horizon, risk tolerance, investment objectives among other factors. Less experienced investors and those who prefer simplicity generally gravitate towards stocks. Investors who favor a more active, tactical investment approach, those who love to day trade or speculate, Investors who like monitoring or playing the markets, etc. may find options more appealing and flexible. However, you don’t necessarily have to pick one option over the other. Although there are differences between stocks and options, both instruments can complement each other, hence finding a way to incorporate both investment strategies could be of tremendous benefit to investors.