Often in the market, investors and traders get stuck when they have to choose one segment of trading willingly. So, let us solve this dilemma together and compare Option trading vs stock trading in the upcoming segment.
But wait! Don’t you think that first, we should be aware of both the segments? Let us try to shed some light on it with the help of some examples.
IPL or Indian Premier League is a buzz in the cricket world, and why shouldn’t it be? It is one of the most successful cricket formats currently. But have you played close attention to the process before it? Yes! We are talking about the auction!
In IPL Auctions, there are various tycoons who bid on players so that they get the best team for themselves.
Now, they analyze the performance of the players in the last season and then reach a conclusion. The better the player performed in the previous season, the higher the price.
So, you can treat the stock market or stock trading as an open ground of auction, where the buyers and sellers analyze the performance of a stock and then bid on the price accordingly.
So the trading of stocks in the stock exchanges (BSE, NSE) is known as stock trading.
Now, the question is, what is options trading? Let us understand this with the help of an option trading example as well.
Let us continue with the example of IPL again. Now, there are some players who garner the trust of the owners all the time and are quickly taken in the team.
But let’s say that this time when the auction happened, Punjab Kings showed their support to a new player Riley Meredith.
Riley Meredith made headlines when he managed to steal the wicket of Steve Smith twice in two days. The hype added when Shane Warne tweeted that Riley Meredith is a good name to look at.
So now, Punjab Kings had great expectations from him. But as the 2021 IPL began, his performance was a little unsatisfactory.
So the investment that was done in his favour did not manage to make use of its full potential, and all in all, it was a loss for the team and also for the investment money.
So, options trading is similar to this. You have an option to either buy or sell the option contract based on your market sentiment.
If the stock performs well in the equity market you can reap the benefit out of the situation by exercising your options contract.
We will understand both segments in detail in the upcoming features.
Difference Between Options Trading vs Stock Trading
Generally, people trade stocks in the stock market, but lately, we have seen people getting indulged in the derivatives segment as well. Options trading has become a milestone in the stock market.
Let us understand the difference between Option Trading vs Stock Trading by understanding the concept individually.
1. Stock Trading
Stock trading, in simple terms, is the buying and selling of stocks in the stock market as we discussed earlier. It is like an open ground, where the buyers and sellers buy or sell shares of the company for a suitable price and execute the order.
Stock trading is one of the simplest ways to invest in the stock market. When you buy the shares of a company, you own a little piece of that company.
For example, you buy 1000 shares of ITC for ₹200 each. This means that you own that part of a company.
When a company decides to go public or gets listed in the stock exchanges, it implies that the company is opening it for the public to have some stake in the company.
In recent times, Zomato decided to go public, and even though the financial performances were not an absolute hit, it still managed to garner a lot of attention.
So, all in all, it is a direct investment in the company. So, you try to buy it at a lesser price and sell it at a higher price.
There are various trading styles in which you can do stock trading. Some of which are as follows.
Just like the call option, there is a put option as well.
In the case of the put option, the seller is moderately bearish; therefore, gives a premium to the buyer in lieu that they will sell the contract at a desirable price, no matter where the market moves.
Now that we have a basic idea of what stock trading and options trading is, let us have a look at what exactly differentiates them from each other.
When it comes to suitability, then options trading is more inclined and suited for active traders and the ones who have had a fair say of experience in the industry.
If you are a beginner then, stock trading might be more suitable for you. The reason being that it is less complicated and easier to understand.
Understand it in this way, when a kid starts going to school, he is first taught how to draw different types of lines and shapes and then the alphabet.
Similarly, the equity segment, which is the stock trading, is good for beginners rather than the derivatives segment.
In stock trading, you purchase the stocks of a company and, in return, get a little part of the ownership corresponding to the shares that you purchased. It is a direct way of investment.
Sunita bought 2000 shares of Reliance industries in 2018, so now she owns a small stake in the company.
In options trading, the investment is indirect, and you don’t really get the ownership.
3. Capital Requirement
Let us start with the help of an example. If Sunny wants to purchase the 20 stocks of ITC at ₹200, then the capital requirement for the same is ₹4,000.
So now we can see that the capital requirement in the case of stock trading is as per the prices of a stock.
Whereas in options trading, the capital required is actually lesser than the price of the stock usually. In all, it depends on the strike price at which you are thinking to bid.
To make it clear, buying a ready to move property demands the whole sum, let’s say ₹50,00,000 at the time of purchasing, while if you want to own a flat in the building that commits the delivery by 2022, then you book your dream home by paying a downpayment, ₹10,00,000 at the time of the deal.
Here the former is what is called stock trading while the latter is the concept of an options trade. Further, the down payment is what we call the premium in options trading.
This premium again gives you the right to exercise or exit from it without exercising it if you find a better deal in the near future.
Furthermore, with SEBI bringing in new margin intraday trading rules, this becomes an even more important aspect to differentiate Option Trading vs Stock Trading.
4. Research and complexity
A lot of people often dread trading options. The reason? It is a little complex and can be confusing and also add to the losses if the right option trading strategies are not used.
Whereas stock trading requires an adequate amount of research but is as simple as buying and selling things in the general market.
Now that we have seen the differences between the two let us take a quick glance at which one is better!
Is it Better to Trade Options or Stocks?
The question now is, is it better to trade options or stocks. The answer to this question might vary from person to person. But just to make it more clear, why not make a pros and cons list of both the trading styles?
It comes with good leveraging and is cost-effective. Let us understand this with the help of an example.
Zara wants to buy shares of ABC company, and the current market price is ₹200. Now, if you’re going to buy 200 shares, you will have to invest ₹40,000. You are sure that the market in the future will go up. So you buy a call option at a strike price of ₹150, at ₹22.
Now, you will have to invest ₹4,400. And if in the future the market goes further up, you can buy more shares at ₹150/share instead of whatever the market price is.
If you use the right strategies, there is less risk involved, and you can go according to your desired prices.
The returns in options trading are higher.
A little complicated and suitable for active traders.
If not accompanied with the right strategies, it can cause subsequent losses.
Requires extensive research.
The liquidity in option trading is less.
Pros and Cons of Stock Trading
Now that we have looked at the pros and cons of options trading, let us have a quick look at the advantages and disadvantages of stock trading.
It is more accessible and best suited for beginner traders.
If you don’t have much time to monitor the progress constantly, you can buy some stocks and hold them for a more extended period.
It is also best suited for long-term goals—for example, higher education or marriage.
The volatile market can cause a lot of fluctuations in the prices and cause subsequent losses.
Requires extensive research.
So, in all, the best trading option for you depends on your financial goals, comfort, and also your knowledge.
So now we hope that you are able to understand the basic difference between Option Trading vs Stock Trading. There are various indicators that you can use to choose the right stock and make the most profitable decision.
In the same way, there are various option trading strategies that you can opt for and make the best out of the situation.
So, the type of experience you have and also your comfort defines the kind of segment that will suit your needs.