Trading Options Is Way Better Than Trading Stocks

When it comes to the question of whether to trade options or stocks, many people are left confused and wondering which one best suits their financial goals. Admittedly, trading any one of these isn’t easy, not least because of the amount of knowledge and experience needed. While they both have the potential for monetary gains, one wrong move could lead to losses.

Stocks: Part Ownership In A Business

If an individual is unable to purchase an entire business entity, they can still hold an interest in it. This interest might be a tiny fraction of an entire business or a sizable portion. A stock represents the units through which ownership in a business is expressed. It can be traded on a stock exchange, enabling an individual or entity to transfer ownership to another. Stocks can exist indefinitely as long as the company they represent exists.

Stocks are closely tied to a company’s performance. Their value will fluctuate depending on the time of the year and other financial or economic circumstances. Overall, their value represents a company’s financial position at a specific period. A decrease in the company’s fortunes, for example, could lead to its stocks plummeting in value and vice versa.

There is a way to address the inherent risks of both trades. For example, by utilizing the best options trading service, you can ensure that you profit more than you lose– the ultimate goal of trading over the long term.

What Are The Options?

Just like stocks, options are also financial instruments that help with acquiring business ownership. They are legal contracts that guarantee an individual or entity the right to purchase an asset( including stocks) at a determined time and price.

Options, also known as stock options trading, trade on a public exchange. Unlike stocks, options cannot exist indefinitely. Their “life” comes to an end when the set time expires. When the expiration date arrives, the parties involved settle an option’s value, after which it’ll cease to exist. On average, an option is more like a depreciating asset; its value declines with time assuming all other factors are constant. The payment for an option contract is called a premium.

The two major types of options include:

i)Call options: This type of contract enables an owner to purchase an underlying stock (one that has to be delivered as per warrant) at a fixed price until a time when the option contract expires. When stocks increase in value, call options follow suit. For those expecting a stock price increase, purchasing a call option is the way to go.

ii) Put options: This is almost like the opposite of call options. Here, an owner can sell their underlying stock at a specified price up until a certain date. Put options increase in value when stock prices fall as long as all other factors remain the same. Buying a put option is a good idea if you believe the stock price will decrease.

Why Trade Options Over Stocks?

While they do have their drawbacks, options offer great investment opportunities. They trump stocks in several ways. Trading options instead of stocks has the following advantages:

1) High returns: One of the main reasons people trade options over stocks is because of the possibility of very high returns. While stocks tend to increase investment by a certain percentage, options tend to increase them several-fold. Leverage– a technique in which financial instruments are purchased using borrowed funds in anticipation of future profits– is ideal for realizing good returns in a short timeframe. Options use the power of leverage to achieve such returns. The options profit calculator becomes an indispensable tool in leveraging the potential of options trading, enabling investors to accurately assess and optimize their strategies for achieving substantial returns within shorter timeframes.’

2) Liquidity: If you’re trading options, there’s always the opportunity to convert them into hard cash as long as the market is open. This is rarely the case with stocks that need to be held for a certain period before you can cash them in. While you may not always make a profit when cashing in your options, liquidity is always a convenience.

3) Reduced charges: Trading both stocks and options online means paying a commission to the brokers whose platform you use for the trade. Many of the leading online brokers take a reduced cut as commission for trading options instead of stocks. In some cases, a broker lets you trade options for free.

4) Lowered capital gains tax: Whether you’re trading options or stocks, you’ll have to pay capital gains tax for any margins you realize. This can be as high as 20 percent of your profits. As an options trader, you may qualify for reduced capital gains taxes over the long haul if you hold onto your options for at least a year. Ensure to find out about such benefits before trading any options.

While trading options can seem riskier at times, the potentially high rate of returns more than makes up for it.