When you plan to invest in the stock market, there are a couple of alternatives.
- Buy shares of a specific company and enjoy the ownership rights of shareholders. You get the voting rights and an enduring claim on the dividends and capital gains.
- Choose options and bet on whichever direction you feel the price will move. It means you can earn profits not just when pricing increases, but even when the rates drop.
However, the way stock and options trading work is completely different. Even different investors type incline toward each. Fortunately, both stocks and options can complement your portfolio.
You will find interesting investment opportunities in the option or stock market. However, never ignore the exchange-traded funds and the low-cost index funds that pack multiple assets in a single investment. Investors can use both to form a foundation for a long-term portfolio. New investors can also find this a great entry point.
New investors can learn options trading skills from SteadyOptions, an online training center. There is a myriad of information in detail about the strategies and trading tools available on their website.
You can dive in the trade market through options or stocks it is fine as long as you make a suitable choice.
Stocks
It is the best alternative for long-term new investors
Beginners looking for a simple and convenient way to start investing with a goal of 5+ years or for retirement, then stocks are the best choice. There is no guarantee that you will earn significant profits because the stock performance can be volatile.
Simplicity is the beauty of stock investment. You buy a stock with an assumption that its price will increase, and at some point, you can sell it at high prices. It is a rule that applies to stock you plan to hold for years or months or weeks or intra-day.
For beginners and investors with long-term strategy will find stocks to be a better alternative than options. You research the stocks you are interested to invest in. When you feel that their growth potential suits your time horizon you invest. There is no need to check them obsessively every day. Keep an eye and when you find the right time or set an alert at a price you desire to sell.
Drawbacks of stocks trading
- The associated risk with stocks is simple. The price can fall to zero, and your whole investment gets lost. As individual stocks’ performance is highly volatile, it is necessary to lock your funds for a minimum of 5 years.
- Diversify your investment to reduce the risk a little more. Never invest in a single stock!
- The brokerage fees for stock trading differ, so shop around. Your basic research as an active trader will affect your performance, so before opening an account compare brokerage fees.
- The capital gains tax rate will depend on the duration you hold the stock and your income. It means if the stock was held for less than one year than the rates are high.
Options
It is great for active traders wanting flexibility
Traders looking for flexibility regarding downside risks or timing or small capital requirement can find options trading more preferable. The associated timing of this alternative is inherently shorter. Therefore, active traders, who regularly buy and sell, find it more appealing. The options contracts have expiry dates that range from days to months, and years.
Many investors enjoy the freedom and flexibility options trading offers. They get time to understand how a specific asset works. They can lock a price without any commitment to buy it. Unlike stock trading, the investing process in options can be a little complex because you need to make three decisions –
- In which direction is the stock headed?
- How low or high will the stock move from its existing price?
- What will be the timeframe when it occurs?
You will need to learn common terms used in options trading like puts, calls, volatility, strike price, premium, moneyness, spot price, etc. It may make you believe that this form of trade is more unsafe than stocks. It is an exaggerated opinion because investors can allow the option to expire without any concern about more financial obligations. They lose the premium paid along with other trading costs.
Long-term investors can choose options as their hedging tool. Buying put options helps to balance the potential losses in case stock value plummets. The premium you pay for the option is similar to an insurance premium.
Drawbacks of options trading
- Traders need to be more active if they wish to use the option before it expires. They need to monitor the specific stock’s price or set alerts.
- Some strategies are risky, so ensure to understand them before you start trading options.
- The related costs are higher than stock trading. More trade = Higher costs
- Flat fee per trade ranges from 0 to $7, and a per contract fee ranges from 15 – 75 cents.
- You even pay fees for selling.
- Consider capital gain taxes, which are high for assets held less than one year.
Which is better for you – Stocks or Options?
Determining which trading alternative is suitable for you is subjective. It depends on your investing style. New investors who like straightforward will opt for stocks. Investors who favor a flexible approach and get thrilled watching the live market movements will find options tempting.
Options will not tie your investment funds like stocks might, so is a great alternative for traders with limited capital. With options, you get to determine when to exercise a put or call. You even get some probability as you decide the strike price.
If your predictability in price or timing goes wrong there is a great lost potential. Even in stocks, there is volatility occurrence, but the advantage over option is there is no pressure of selling.
Invest in stock and options, simultaneously. The help you diversify your portfolio, which is crucial for risk management. However, in the end, which is the right choice comes down to your trading style.
