Stocks represent shares owned by a person in a company. These shares indicate the percentage of ownership a person has in one or more companies. A person can hold stocks beyond expiration. Conversely, options only give you the right to buy or sell shares in a company, by a specified date. One key element of an option is that there always has to be a seller for every option purchased.
1. Voting Rights
In the case of stocks, shareholders have a say in the running of the company. They have voting rights, which they can use to decide important company matters. They make money by getting a share of the dividends. Stock option holders get no dividends, and also do not get voting rights.
2. Expiration Dates
Stocks can only expire if the company ceases to exist. Unless that happens, stocks retain their value. In this view, stocks are valued as financial assets. Unlike stocks, options have an expiration date, after which the buyer is unable to sell the options. Not being able to sell them before the expiration date can incur a loss.
As stocks are assets, they are sold to interested buyers at any time. However, options are only trading instruments, and their expiration date curtails their sale and purchase.
Market forces determine stock prices. Supply and demand for its product and predicted sales, all have a bearing on the stock price. As a result, stock options prices are dependent on the price of the underlying stock.
Options are not available at just any price. They are traded with strike place intervals of $0.50 or $1. For some higher stock prices, there are intervals of $2.50 or $5.
In the case of stocks, there is a possibility of losing the principal investment. And sometimes, even more. Option holders, on the other hand, only risk the premium they had paid. The premium is the price of the option. The risk of owning options is higher. An uncovered call can cause you to face unlimited potential loss. However, with high risks, there are high rewards.
5. Key Differences
When trading in stock options, the buyer and seller are betting against each other. A seller is selling their options because they believe the price of the stocks is about to go down. Similarly, a buyer, on the other hand, purchases stock options considering the options price to go up.
This means buyers can buy stocks at fixed prices. It does not matter how much the value of the stock appreciates at the time of the purchase.
Stock options are great risk management tools. So, they act as insurance policies against drops in stock prices. The investor can insure themselves against losses below the strike price, at the expense of the option’s premium. This practice is called hedging.
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