First-Time Investor Guide: The Difference Between Options vs. Stocks

First-Time Investor Guide: The Difference Between Options vs. Stocks

Are you brand new to investing? Arm yourself with as much knowledge as possible! Let’s start with the difference between options vs. stocks.

Are you a first-time investor who’s always wanted to get into the stock market? Maybe you’ve thought of expanding your portfolio, especially during the COVID-19 pandemic?

Perhaps you’re familiar with stocks, but you don’t know much about stock options, and you’d like to get involved in buying them? Statistically, this is one of the most volatile stock markets the United States has ever experienced, and it pays to have a safety net.

But, you can use it to your advantage in both stocks and options if you educate yourself on the differences between the two. Keep reading to learn about options vs stocks.

Options VS Stocks: What You Need to Know

The fundamental difference when it comes to stocks vs options is that a stock provides you with part ownership of a company. Options are contracts that you purchase, which provide you with the right to buy and sell an asset.

Options

As mentioned above, options give you the right to purchase an asset from a company which has to be done within a certain time period. The assets you can buy as options are commodities, indexes, or futures.

When you own stock options, you have the right to sell a “put option” or buy a “stock option”.

Options have premiums which are basically its price. Think of it as your insurance policy premium.

Options can have a basement or a number that you can make as a put option to automatically sell if it drops.

Say, for instance, you have a stock with a $50 value per share, and you have a put option on that stock at $25 per share. If the stock goes down to $10 during your option period, you will still be able to cash it out at $25.

Another way trading options vs stocks is beneficial is when you might think the market will burst soon. Let’s say your rubber stock is booming. But, you fear or see that the bubble might burst on the rubber market.

One of the main strategies for options trading is that you can buy a put option at a certain price, so when the bubble bursts, you can cash out without taking a bath.

Commodities

Commodities are basic goods that are interchangeable with other similar goods.

They need to meet what is called a “basis grade” which is the minimum standard that it has to be met to be traded as an asset on a futures contract. You might also hear it called contract or par grade.

Indexes

Indexes are those such as The Dow Jones Industrial Average, Nasdaq, and S&P 500. A stock market index or market index helps investors measure and compare prices and market value.

Think of it as a subset of the stock market that compares current and past prices to help determine stock performance and projections.

Futures

The easiest way to understand what “futures” are is to think of them tangibly. Maybe you own a latex company and need to buy rubber which is harvested from rubber trees.

You might understand the price of rubber is going to be different six months or a year later because the prices of many goods fluctuate daily.

So, you’ll enter a “futures” contract with the manufacturer to purchase the rubber at a specified price and on a certain date. This will help you to sell your finished product at the highest profit margin.

However, the rubber farmers need to make their living also so you’ll negotiate with them what would be a fair price, so both sides make a profit.

Stocks

Stocks are small shares of a public corporation that are divided into levels of ownership for a company. You can purchase stocks that allow you to be a shareholder in a given company.

One of the main differences between trading options vs stocks is that you can own stocks for as long as you want whereas options have a certain time period.

Stocks come with much simpler formulas for trading, and options can be quite complicated because there’s more uncertainty. With stocks, it’s all about buying low and selling high.

You need to be able to predict market trends or have a stock advisor who’s knowledgeable, experienced and has your best interest at heart. Although, that’s not easy to find.

If you buy 20 shares of a rubber company at $10 per share and the stock booms up to $30 dollars per share you’ll want to sell a good amount of the stock. You end up practically tripling your money. That’s a great play.

Advantages

There are advantages to trading both stocks and options. It all depends on what type of investor you are or want to be.

However, it should be said that doing both is a way to not miss out on one side of the playing failed.

Stocks are straightforward and can be much more predictable than options in some ways. They’re easier to spot trends and are less complicated. Plus, there are no value or time limits with stocks.

Stocks are more for the long-term investor. You can buy them at a good price and watch them grow over time.

You can diversify stocks with several different companies that are reliable and always seem to be growing. Even if it’s a slow-growth, that’s what you want.

Then, years later, when you’ver made a good deal of money, you can decide what you think the market cap is for each stock and sell accordingly. Or, sell a portion of it and keep the rest just in case it continues to grow.

As far as the advantages of options, you are able to buy and sell them at a set price no matter what the market does. Say we experience another crash; if you have an option price to sell at a certain number, the crash won’t affect you much.

Now You’re Ready

You not only have the basics but you also know some of the deeper ins and outs of options vs stocks trading. You know what commodities, futures, and indexes are as well as which type of investor you might want to become.

Check out our education or trading blogs to learn more about investing.