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