Options can be less risky for investors because they require less financial commitment than stocks, and they can also be less risky because of their relative imperviousness to the potentially catastrophic effects of opening breaches. Options are the most reliable form of coverage, and this also makes them safer than stocks. While investors can certainly trade options alongside stocks, buying options also comes with some unique risks. An option loses all of its value after a certain date, while stocks tend to retain their value indefinitely.
As we mentioned, options trading can be riskier than stocks. However, if done correctly, it has the potential to be more profitable than traditional stock investing or can serve as an effective hedge against market volatility. Not sure about the differences between options and stocks? You don't have to worry anymore, as we have everything you need. To decide which investment is best for your needs and objectives, options versus stocks, start by analyzing what type of trader you are.
Like all securities, stocks and options have their place in a diversified investment portfolio. However, when comparing options to stocks, most financial experts agree that stocks represent a better long-term investment than options. While stocks tend to be more expensive than options and can lose all their value, options expire worthless after specific dates. An option specifies a predetermined price at which the security can be bought or sold and a predetermined expiration date, after which the option ceases to have value.
Options contracts give the investor the option to buy or sell an underlying asset at a predetermined price, the exercise price, within a specified period of time. By buying a call option from the author of the option or from the seller, both of them agree on the exercise price or what they would pay to buy the underlying shares. An option has a fixed life, with a specific expiration date, after which its value is liquidated among investors and the option ceases to exist. It's also worth remembering that trading options have an initial cost, or a higher commission, which can affect future profits.
A key distinction between stocks and options is that options have a pre-set expiration date, which can range from one week to several years. Stocks with limited public interest or that are listed on over-the-counter markets are less likely to support an efficient options market. Before buying or selling options, investors should read the brochure on the characteristics and risks of standardized options (PDF 17.8 MB), also known as an options disclosure document. With a put option, the holder of the put option retains the option to sell the given value at a certain exercise price on a certain date.
Making profits through options trading requires close monitoring of price movements during the term of the contract. There's no doubt that it can take some time to master the terminology and technique of trading call options. Read on to learn more about the difference between stocks and options and how trading options (or stocks) may be right for you.