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A capital stock, or simply known as stock, of any business entity is a representation of the original capital invested into the business by its founders. It is a type of security that would signify ownership within the business or the company.

 

There are two types of stocks, common and preferred. Owner of common stocks would generally have voting rights. This means he or she can attend shareholder meetings, vote on issues, and receive dividends.

 

Preferred stock on the other hand does not have the same voting rights as common stock, generally speaking. However, they have higher value or claims to earnings and assets compared to the former. One such example of this preference is that people holding this would receive their dividends first before common stock holders, in case the company is liquidated.

 

An option on the other hand is a contract or a financial instrument between two parties, a buyer and a seller. The buyer would gain the rights to purchase a particular asset, but not the obligation to do so. The buyer can simply opt to purchase or not depending on his or her discretion. The asset price is fixed. This asset can be a property, goods, or stocks.

 

The seller on the other hand would incur the obligation to fulfill delivery of the asset once the buyer exercises his or her option to purchase the said asset.

 

Stocks and options have one main similarity, they are both securities. Below however, are the main differences between the two.

 

Derivatives

Unlike stocks, options are actually derivatives. This means that options have an expiration date; and if the expiration date runs out, the buyer of the option loses his or her right to purchase the asset. Two of the leading brokers for trading options are OptionsXpress and TradeMonster which you can learn about them at http://bestratesin.com/optionsxpress/774/ and http://bestratesin.com/trademonster/888/ respectively.

 

Stock on the other hand does not have an expiration date and you can essentially hold onto it forever or at the very least, until the company is still in operation.

 

Rights

There is also a huge difference in rights when holding a stock or an option. With stock, depending on the type, you have the right to dividends, to vote, and basically you have rights as part owner of the company. With an option, you simply have the right to purchase and nothing else. You do not have the same rights as stock holders until you purchase them.

 

Possible Profit

Another huge difference between the two is the potential for profit. With an option, you are able to leverage profit. This is the main reason why a lot of investors put their money into this and why some of them actually make huge income after a single, well thought of, well planned transaction with option contracts. Of course, it still depends on the person. This is by far not a sure thing.

 

On the other hand, stocks can provide you with dividends and the ability to gain when the stock price goes higher than what you have bought it for. With that, gains in stock trading are not as impressive as compared to options except in very rare instances. But it is important to remember though that even if options tend to have bigger potential profit, this is far from a sure thing and you can also gain as much with stocks given the right circumstance.

 

Both stocks and options are similar since they are securities, but their nature, use, and abilities to gain for the investor differ greatly. But if you want to know which one is better, the answer there is neither. Both of them have their own advantages and disadvantages. Which one would make you more profit depends entirely on your strategy, on your goals, and how you handle these investments.