Every business trader does not know the difference between stock trading vs options trading. The main goal of every trader or investor is to make maximum profits by undertaking activities that pose the minimum risk.
Stock Trading vs Options Trading
To do so, one has to acquaint themselves with various forms of trading such as stock trading vs options trading. Both the terminologies are different as far as characteristics are concerned and they also have a diverse concept associated with them.
A simple way of explaining the two is that trading stocks are something akin to gambling. Since the bet is against the house, all the customers can win or lose depending on their luck and also trade on forex.
What is Stock trading?
A stock trader is someone who engages in the frequent buying and selling of stocks in order to cash on the frequent price changes. This can be an agent, a stockbroker, hedger or speculator. Stock trading is of two types- active trading and day trading. The former is where investor places 10 or more trades each month.
They use market timing and short-term events like market fluctuations to their advantage for attaining maximum profit. The latter buy, sell and close their position on stock within a day.
What is Option trading?
An option is a contract that permits the investor to purchase a financial instrument at a predetermined price for a particular time period. The process of buying and selling options takes place in the options market. Though, options are not equivalent to stocks as they do not represent ownership in an enterprise. This sort of trading has many other aspects which you can learn in an options trading course.
Difference between stock trading vs options trading
Perhaps the most vital aspect that differentiates stock trading vs options trading is that stocks offer you ownership in a company whereas options are just contract that only give you rights to buy and sell stocks, that too by a specific date.
Options trading comes with less risk to the investor as they require a lower level of financial commitment as compared to equities. Also, unlike stocks, options are not that impacted by market fluctuation or other gap openings. Being a dependable form of hedge, they are a safe bet in comparison with stocks.
With stock purchase, shareholders receive voting rights which is not the case with sock options. The former is valid as long as the company exist which also makes it an asset, while the latter comes with an expiration date, post which investor has no choice but to buy or sell it.
Stock trading and options trading are both vital aspects of the same sector but have strong differences. It is necessary to study them in detail before taking a plunge into the vast and dynamic world of trading.