Is options trading better than stocks?

Summary

• Both options and stocks are beneficial assets for the growth of an investment portfolio.
• While beginners generally stock with equities, investors with an active investment approach may find options exciting.
• However, it is essential to know what is better for you before marching forward. 

Both options and stocks are beneficial assets for the growth of an investment portfolio. While stock investing is a straightforward way for investors with long-term goals, options trading is a more tactical approach to investing.  Beginners generally stock with equities. Investors with an active investment approach may find options exciting.

Deciding whether options or stocks are better for you is an entirely personal choice. However, there are certain things all must know about the two investment options.

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Options trading

An option is referred to as an agreement that is executed between a buyer and a seller. The agreement allows the two parties to buy or sell an underlying asset on a given date at a pre-determined price. However, this agreement between the buyer and the seller may or may not be binding.

Why go for options trading

Active investors looking for a tactical approach for trading generally find options trading exciting. Such investors have smaller investment requirement and flexibility concerning downside risks. Options trading comes with expiration dates, which can range from days to years.

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What also sets apart options trading from regular stocks trading is that rather than making one decision like how much higher the prices would go, investors can take up three choices:

• Where is the stock heading?
• How much higher or lower will the stock price move from its current price?
• The time frame in which this may happen.

However, investors must be familiar with the several strategies in options trading to make the most of it. They would have to be well-acquainted with the vocabulary of terms like puts, calls and strike prices. Options trading could also be used as a hedging tool.

Disadvantages of options trading

• Investors are expected to keep a close eye on the related stock’s price if he wishes to exercise the option before expiration.
• In addition, there are a few options strategies that are riskier than the others.
• The costs involved in options trading is higher than for stocks.

Stocks

A stock is a security that represents ownership of a fraction of a company. The ownership also gives the shareholder voting rights in the company. You also get dividends from the company as and when it decides to do so.

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Why go for stocks

Investing in stocks is a very straightforward way to begin making investments. You can buy a stock with the hope that its price would rise in the coming years, and you could sell it at a profit down the line. Stocks are a more standard entry point into the stock market since they include lower expenses compared to options.

You just need to buy stocks that match your investment goals and sell when the price reaches a level you want to sell.

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Disadvantages of stocks

The risks associated with stocks are also straightforward. In a market full of volatility, stocks can be highly volatile, resulting in losses to investors. The commissions and fees associated with stock trading also vary from brokerage to brokerage.  Also, the stocks can invite capital gains tax.

Options trading vs stocks

As already discussed, while stock investing is a straightforward way for investors with long-term goals, options trading is a more tactical approach to investing.  It is a personal decision to choose between stocks and bonds based on the investing style. Whatever you decide, you must thoroughly completely understand what you are doing.

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