Options and stocks both trade on stock markets, but they have different benefits and perform in very different ways.
What are stocks and how do they work?
A stock is also known as an ownership share. When you buy shares of a company that is listed on a stock exchange, you purchase a part of the company. The owner of the stock receives a portion of the corporation's assets and profits.
Some stocks pay dividends, either monthly, quarterly or yearly. A dividend is a pay out that a company makes to its shareholders as part of its profits.
What is an option and how does it work?
An option gives the holder the right to purchase or sell a stock or a bond at a specific price and on a specific date. It does so by setting a predetermined price and an expiration date, after which the option is worthless. With options trading, you do not earn dividends but have the potential to maximize the gains from your investment.
There are two types of options:
Call option:
A call option gives the investors the right to buy an underlying asset (like a stock or bond) at a “strike price” mentioned in the options contract on or before the expiration date. Investors buy call options when they believe the price will increase and sell them when it decreases at a set price.
Put option:
Put options are contracts that give the investors the right to sell an underlying asset (like a stock or bond) at a specified price on or before the expiration date. Put options are sold when the investor believes that the asset's price will increase and are bought when the price decreases.
What is the difference between options trading and stock trading?
The difference between trading with options and stocks are:
1. Ownership
Investing in stocks gives ownership of a company, whereas options do not give you ownership rights.
2. Dividends
When you invest in stocks you earn dividends (a portion of the profits). Options don’t pay dividends.
3. Investor type
Stocks are a good fit for beginner and long-term investors. Options are a good fit for active traders.
4. Type of investments
Stocks are equity investments, whereas options are derivatives. In other words, stocks invest directly in the company, while options trade on the performance of a stock or a bond.
5. Time
Stocks have an indefinite lifetime. They’re good for as long as the company trades its stocks on the stock market. Options have expiration dates, often weeks or months or less than two years.
6. Quantities
When you have options, you can only buy in lots that represent 100 shares. When you buy stocks, you can buy as much as you want, as long as the seller is willing to sell the amount of shares that you want.
7. Tax
Both options and stocks are taxed as short-term or long-term capital gains, depending on the holding period.
Factors that affect your credit Ways to help you diversify your portfolio.
How Bright can help
If you’re looking to start investing, Bright can build a financial plan that’s tailored to you. It’s a good place to start. Bright can help grow your savings and offer a clear step-by-step guide to your financial goals.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your bank and your credit cards, then set a few goals. Bright gets to work right away, building a personalized Bright Plan, helping you get debt-free and growing your savings, automatically.
