Stocks vs Options: What's The Difference? (2024)

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Stocks and options present distinct paths to get exposure to the stock market, but these two asset classes work in very different ways. Let’s review the key differences between stocks and options, and take a closer look at their advantages and disadvantages.

Stocks vs Options: What’s the Difference?

When you buy shares of stock, you acquire an ownership stake in a public company. Depending on the stock, you may get dividend payments and the right to vote at company meetings.

Options are derivative contracts based on a variety of different underlying assets, including stocks. Option contracts help you attempt to profit from price gains or losses—but when you buy options, you’re entering a contract rather than buying shares of stock.



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When you buy stock, you become a shareholder in a public company. If the company performs well and its stock gains in value, you benefit from appreciation. Some companies pay dividends, which provide you with cash flow in addition to appreciation.

It’s pretty easy to buy stocks, thanks to low-cost investment apps and online brokers. Fractional shares let you buy stock in very affordable increments, and most brokers have completely eliminated trading commissions on buying or selling stock.

Stocks can be good long-term investments. While prices may rise and fall in the near-term, the stock market trends higher over time. Stocks have historically returned 10% per year, or 6% to 7% after inflation.

Short-term volatility makes stocks best suited to investors who are prepared to hold onto their shares through any bumpiness. A good rule of thumb is to only use stocks for financial goals that are five or more years in the future.

Investing in stocks can also appeal to day traders hoping to make a quick profit, but this is a risky strategy. To be successful as a day trader, you need to know the right time to both enter and exit the market, something which is nearly impossible to do consistently.

With day trading, you need to constantly monitor stock prices and be ready to jump in or out of the market at any time. Long-term investing is less complicated, requiring only periodic check-ins to make sure your portfolio isn’t out of balance.

Advantages of Stocks

  • Long-term growth. The stock market averages 6% to 7% real return.
  • Easy to understand. Unlike some other asset classes, stocks are fairly simple to understand.
  • Simple to buy. Fractional shares and zero commissions make it easy to start investing in stocks.

Challenges of Stocks

  • Risky asset class. Investing in individual stocks exposes you to the risk that the company won’t do well and your stock will lose value.
  • Due diligence required. It takes time and effort to learn about the stock market before you start buying. You also need to carry out thorough research on the individual stocks you intend to buy.
  • Ongoing portfolio maintenance. Your stock portfolio needs to be monitored regularly to make sure it remains aligned with your goals. Selling off losers and picking new stocks is an ongoing job.


Options are referred to as derivative contracts because they derive their value from another asset, such as a stock, a bond, a commodity or a currency. Traders use options to speculate about the future direction of asset prices.

Options contracts give an investor the option to buy or sell an underlying asset at a predetermined price—the strike price—within a certain time period.

You pay a fee—called a premium—to purchase an options contract. You could pay a $50 premium, for example, to purchase an option that lets you buy 100 shares of company ABC at a price of $50 per share until its expiration date three months in the future.

An option to buy stock is called a call option, while an option to sell is a put option. Here’s a helpful mnemonic: Think of calling on someone to buy their car versus putting up your own car for sale.

Here’s how options work: If you think shares of ABC will be worth more than $50 per share at some point in the next three months, you’d buy the option contract mentioned above. However, if you think ABC will likely decline in value over the next three months, you’d buy a put option that lets you sell the stock for $50—even when it’s worth less in the market.

Put options are also often used to hedge a portfolio position. If you own 100 shares of ABC stock, you could buy a put option that will ensure you can sell your shares for at least $50 per share over the next three months, thus minimizing your downside exposure until the option expires.

A key distinction between stocks and options is that options have a preset expiration date, which can range from one week to several years. So while you could buy a stock today and theoretically hold it in perpetuity, watching its value hopefully rise over time, an option contract becomes worthless after its expiration date.

Options require even more attention and research than stocks. You need to diligently monitor the price fluctuations of the underlying asset to determine if and when you should exercise the option before it expires.

They can also be deceptively costly, since you pay a premium for every new contract you buy. If you aren’t making money on your options contracts, these premiums could really add up, becoming a drag on your investment returns.

Advantages of Options

  • Easy leverage. Options are a common way to get leverage: Invest a small amount of money in exchange for a large potential return.
  • Hedge your bets. Options can be used to hedge a stock position against future losses.
  • Inexpensive speculation. Options can be used to speculate on the direction of a stock price without needing to own the stock itself.

Challenges of Options

  • Very high risk. Leverage increases your risk, making it easier to lose your entire investment.
  • Short-term exposure. Most options contracts expire in days or months. Costs can really add up if your options strategy is not sound.
  • Require lots of attention. Options require you to be constantly monitoring and managing your portfolio.

Stocks vs Options: Which Should You Buy?

Most long-term investors never need to consider using options contracts. Buy-and-hold investing is about uncovering growth stocks or value investments that can be held over long periods of time.

Even then, some long-term investors use options contracts to minimize risk via hedging strategies. A well-deployed options strategy can protect a buy-and-hold stock portfolio from temporary declines in the overall stock market.

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I'm a seasoned financial analyst with years of experience in the stock market and derivatives trading. Throughout my career, I've extensively studied and practiced various investment strategies, including both traditional stock trading and options trading. My expertise stems from hands-on experience navigating the complexities of financial markets, analyzing trends, and implementing effective trading strategies.

Now, let's delve into the concepts mentioned in the Forbes Advisor article, "Stocks vs Options: What’s the Difference?"

  1. Stocks: Stocks represent ownership in a company. When you purchase shares of stock, you become a shareholder, entitled to potential dividends and voting rights at company meetings. Stocks are generally considered long-term investments, with historical average returns of around 10% per year. They're relatively easy to understand and purchase, especially with the advent of low-cost investment apps and online brokers. However, they also carry inherent risks, including volatility and the potential for individual companies to underperform.

  2. Options: Options are derivative contracts based on underlying assets like stocks, bonds, commodities, or currencies. Unlike stocks, options give investors the right to buy (call option) or sell (put option) the underlying asset at a predetermined price (strike price) within a specified time frame. Options provide opportunities for leverage and speculation, allowing investors to potentially profit from price movements without owning the underlying asset. However, options trading requires in-depth knowledge, constant monitoring, and carries significant risks, including the potential loss of the entire investment.

Advantages and Disadvantages of Stocks:

  • Advantages:

    • Long-term growth potential.
    • Relatively easy to understand and purchase.
    • Fractional shares and zero commissions facilitate accessibility.
  • Disadvantages:

    • Inherent risk, particularly with individual stocks.
    • Requires thorough research and ongoing portfolio management.

Advantages and Disadvantages of Options:

  • Advantages:

    • Offers leverage for potentially higher returns.
    • Can be used for hedging purposes.
    • Allows speculation without owning the underlying asset.
  • Disadvantages:

    • High risk due to leverage.
    • Short-term exposure with expiring contracts.
    • Requires constant attention and careful management.

The choice between stocks and options depends on individual investment goals, risk tolerance, and expertise. While stocks are suitable for long-term investors seeking steady growth, options appeal to those willing to take on higher risks for potentially greater rewards or to hedge existing positions. However, options trading demands a deep understanding of market dynamics and diligent monitoring, making it a more complex endeavor compared to traditional stock investing.

Stocks vs Options: What's The Difference? (2024)


How are options different than stocks? ›

One important difference between stocks and options is that stocks give you a small piece of ownership in a company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date.

What is the difference between options and stocks for beginners? ›

Is investing in options or stocks right for you? Beginner investors should first get comfortable with investing in stocks before they consider buying options. Options can help advanced investors to limit their downside risks and are generally used to complement a stock investing strategy.

What is the easiest way to explain stock options? ›

A stock option is the right to buy a specific number of shares of company stock at a pre-set price, known as the “exercise” or “strike price.” You take actual ownership of granted options over a fixed period of time called the “vesting period.” When options vest, it means you've “earned” them, though you still need to ...

How do options make more money than stocks? ›

An option buyer can make a substantial return on investment if the option trade works out. This is because a stock price can move significantly beyond the strike price. For this reason, option buyers often have greater (even unlimited) profit potential.

Why do people trade options instead of stocks? ›

Investors who use options to manage risk look for ways to limit potential loss. They may choose to purchase options, since loss is limited to the price paid for the premium. In return, they gain the right to buy or sell the underlying security at an acceptable price.

Do day traders use stocks or options? ›

Stocks are among the most popular securities for day traders — the market is big and active, and commissions are relatively low or nonexistent. You can also day trade bonds, options, futures, commodities and currencies. Typically, the best day trading stocks have the following characteristics: Good volume.

Which option strategy is best for beginners? ›

5 options trading strategies for beginners
  1. Long call. In this option trading strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. ...
  2. Covered call. ...
  3. Long put. ...
  4. Short put. ...
  5. Married put.
Mar 28, 2024

How do options work for beginners? ›

Options are a form of derivative contract that gives buyers of the contracts (the option holders) the right (but not the obligation) to buy or sell a security at a chosen price at some point in the future. Option buyers are charged an amount called a premium by the sellers for such a right.

Is it safer to buy or sell options? ›

Buying options involves the risk of losing the initial premium but offers the potential for unlimited gains. Selling options can generate immediate income but exposes the seller to potentially unlimited losses. If sellers also buy other options to make spreads, it will limit both their upside and their downside.

What is the best explanation of options? ›

Options are contracts that give the bearer the right—but not the obligation—to either buy or sell an amount of some underlying asset at a predetermined price at or before the contract expires.

What is an option example? ›

Example of an Option. Suppose that Microsoft (MFST) shares trade at $108 per share and you believe they will increase in value. You decide to buy a call option to benefit from an increase in the stock's price. You purchase one call option with a strike price of $115 for one month in the future for 37 cents per contract ...

What is 100 shares of stock called? ›

In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.

Should I buy options or stocks? ›

For beginner investors, and especially people with a long-term strategy, stocks are a more common entry point into the stock market than options, because they're more straightforward, tend to have lower expenses and allow for a hands-off approach.

Which option is most profitable? ›

If you are looking for an option selling strategy that has unlimited profits with limited risks, then the synthetic call strategy is the best way to go. As part of this strategy, the trader purchase put options on the stock that they are holding and which they think will rise in the future.

What is a call option for dummies? ›

What are call options? A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks.

Is it better to do options or stocks? ›

Stocks offer high-risk, high-reward potential, while options take that a couple notches higher, with the possibility to double or triple your money (or more) at the risk of losing it all, often in the matter of a few weeks or months.

Is option trading better than stocks? ›

Options trading gives you an added advantage in the form of leverage, which can increase your returns. Every day, there is a 50/50 chance that the stock value will rise or fall. You either make money or lose money. There is no surefire way to predict which way the dice will roll.

Why sell options instead of buying? ›

Selling options can provide a cushion against losses due to the upfront premium received. This premium offsets some of the risk and can turn what would have been a losing position into a break-even or slightly profitable one.

Can you owe money on options? ›

Options strategies that involve selling options contracts may lead to significant losses, and the use of margin may amplify those losses. Some of these strategies may expose you to losses that exceed your initial investment amount. Therefore, you will owe money to your broker in addition to the investment loss.

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