There are several ways to grow your investment portfolio, but the two most popular investments are stocks and options. Knowing the difference between these two types of financial vehicles and having a good idea of your goals and risk tolerance can ensure you select the right investment option for you. Here we explore what stocks and options are, the difference between the two, and when you should invest in each.
What Are Stocks?
Stocks are an investment vehicle that gives investors an ownership share in a company. For example, if you bought stock in Apple, you’d essentially own a portion of that company, depending on the quantity of stock you purchased. Owning stock in an organization often gives you the right to vote in shareholder meetings and contribute to big decisions the company makes.
The primary reason investors purchase stock is to make a return on investment. This happens when either the stock appreciates in value or when the stock pays dividends. Most investors purchase stock in several companies in different industries to build a diverse portfolio and limit risk.
What Are Options?
Options are financial instruments that are based on underlying securities and come in the form of a contract that provides buyers with the opportunity to buy or sell the option in a set timeframe. There are two different kinds of options. Call options enable an option holder to buy the asset at a set price within a certain timeframe, while put options allow holders to sell the asset at the stated price within a certain timeframe. Buyers are not obligated to buy or sell the option.
Stocks vs. Options
There are several things to consider when discussing stocks vs. options, including their differences. The following are a few of the most important differences seen in stocks and options:
- Stocks give buyers an ownership share in a company, while options give buyers the right to buy or sell shares of a company with no direct ownership.
- Options often provide more flexibility and make it easier to determine how much you stand to lose or gain, whereas stocks are more concrete and offer little predictability.
- There’s no pressure to sell stocks, so you can hold on to them when the prices waiver. With options, you must sell or buy the option within a set timeframe or risk missing out on turning a profit.
When Should You Invest in Stocks?
Investing in stocks is a great choice for beginner investors who are looking for simplicity and a straightforward way to start building their portfolio. Stocks are also a common choice among long-term investors who want to grow their wealth over a longer period of time.
When Should You Invest in Options?
Options are a good investment for active traders who are attracted to flexibility and a more tactical approach to investing. The time period associated with options investments is significantly shorter, making options appealing to regular traders who trade for a living. Options are also a good choice for investors who want to diversify their portfolio and enjoy flexibility.
Understanding your financial goals and what you want to achieve from investing will help you decide what type of financial vehicle is most appropriate for you.