There are a few ways to get your money working for you out on the market. If you’re aiming for high profits, the question will inevitably come down to options vs. stocks. Both options can suit the needs of an investor, but it’s important to be aware of just how different they can be in terms of risk and reward. Both are relatively high-risk compared to other investments, but options tend to be of even higher risk still. With that much higher risk comes a more significant potential for profit, as well.
When it comes to high-profit investments, it’s usually agreed that out of options trading vs. stocks, stocks are better for beginners. In contrast, options might appeal to those who have been investing for some time and are more willing to tolerate risk.
In this article, we will look at their primary differences and when each can suit your needs.
How Are Options Different From Stocks?
At a very basic level, the asset you’re buying is different when you go options trading than when you buy stocks. When you buy stock, you buy shares of ownership in individual properties.
However, an options trading example might see you betting on the direction that you anticipate a stock price to move in. You’re not investing in the stock itself; you’re putting money on the likelihood of the stock going in a direction that you anticipate.
So, why trade options instead of stocks? We will break down the pros and cons of each a little later in this article, but the primary benefit is that they offer a much higher return for potential profits. At the same time, they also bring returns quicker. Of course, this comes with the caveat that you can also lose money much easier.
So, the decision of day trading options vs. stocks tends to be about how much you are willing to tolerate. Beginner investors looking for straightforward investments may want to stay away from options at first until they have built a decent portfolio of their own. In contrast, those looking for more active profit management might choose options.
Why Are Options Riskier Than Stocks?
It might seem that since you’re putting your money on the movement of the stock market, either way, stocks and options should carry the same amount of risk. However, it’s not that simple.
When you put money into an option, you effectively buy a bet as to whether or not it goes up or down in price. You’re not buying the stock itself. However, the inherent risk to options is due to the nature of how time factors in.
Every option has a time premium that’s built into them. The sooner that a stock moves in the direction you have bet on with your option, the better it is for you. If you’re left waiting a lot of time for it to move, you’re going to lose that premium, and you won’t get as much money back. You want the stock to move sharply in the direction you want within a relatively limited period.
This factor makes options valuable for day-traders, offering them the opportunity to make big money in a short time for short-term decisions. This is why in the question of options vs. futures or options vs. equity startup, options will often win out.
Stocks
Let’s start by breaking down the basics of “what are options vs. stocks” by looking into the more common options. Simply put, stocks are a representation of shares in the company you’re investing in.
You are investing in the company’s ownership, and if the company’s value goes up, then the worth of your stock goes up. If the company’s value goes down, your stock’s worth goes down. Day trading typically involves actively trading stocks over shorter time frames, such as within days or weeks or each transaction, but most people tend to trade long-term.
Stocks: Pros and Cons
Of course, like every investment, stocks have their benefits and their drawbacks. Here, we’ll look closely at each:
- Good returns: While they might not win in terms of direct competition between options vs. stock returns when both go well, stocks tend to make enough money to stay ahead of inflation, and they grow with the economy, making them solid investments.
- Very easy to buy and sell: There are a lot of different platforms that allow you to buy and sell stocks, including through brokers or doing it online. You can sell stocks you have bought at any time.
- Options on how to make money: If you’re looking for straight profit when comparing options vs. stocks profit, then options tend to have bigger potential returns. However, stocks can also pay dividends for those who prefer more frequent cash returns.
- High risk: Compared to most investment options, stocks are relatively high-risk. They should not be treated as savings for that reason but as an active investment.
- Research needed: You can use pre-made stock portfolios, but for the best results, you should be paying attention to the market to get a good idea of when to buy and sell.
Simply put, if you are a beginner investor, stocks are straightforward, albeit still a somewhat high-risk method that is accessible and competitive. Make sure to keep up to date with all the events on the stock market and follow investment newsletters.
Options
Options might frequently be referred to as “betting on stocks,” but that’s not quite what they are. More accurately, an option is the right to buy a stock (or sometimes different assets) at a specific time, with those rights having an expiration date based. You can buy “call options,” which enable you to buy the underlying stock at a specific time with an intention for them to rise while buying a “put option” sees you selling a specific stock with the expectation that it will fall in value.
With options, you don’t make money based on the changing value of the stock but on the accurate prediction of whether the stock is going to move according to your expectations.
Options: Pros and Cons
Day trading options vs. stocks will largely depend on which benefits matter most to you and which drawbacks you wish to avoid, so let’s look at them in more detail:
- Huge potential returns: When you’re buying an option, you’re buying a prediction on a set outcome within a short amount of time. The chances of being correct repeatedly, in the long term, are admittedly low; as such, you tend to have much higher potential returns with options when compared to stocks.
- Fast returns and losses: While day traders trading stocks can see stocks being bought and sold within days or weeks, options can move even faster; being bought and sold within the same day or even within hours. As such, it’s not impossible to see your money double within a week or to lose it all.
- Requires a lot of attention: Options require you to be more hands-on than stocks. There are no set-it and forget-it options, as you want to make sure you exercise an option before its expiration date, acting when it has the most value to you.
- Much higher risk: Given that they operate on a limited time frame and see you putting money on a more specific outcome than the general movement of stocks, it should be no surprise that options come with more risk.
- Higher related costs: When you work with options traders, you’re usually paying a flat fee for each trade, meaning that the more you trade, the higher your costs get.
Options can allow for the explosive growth of your investment money but also come with great risk. As such, they’re usually recommended to those with plenty of experience with the assets that they’re buying options on.
Which One Is a Better Choice for Me?
When it comes to options vs. stocks, choosing which is better for you depends on your aims and what you’re willing to tolerate. If you’re willing to put money aside with a much higher risk of losing it, then there is that chance that options can make you rich. Most successful options traders are willing to tolerate risk to see an opportunity for explosive growth.
If you want to make options, there are many strategies available, including 1,000 a day trading options on some online platforms. Just make sure that when answering the question of options trading vs. stocks, you’re considering your own goals, your existing portfolio, and your risk tolerance.
If you’re looking for somewhat more stable profit and growth of your money, then stocks might be the best option.
