How To Find The Difference Between Stocks and Options ?
Newcomers to the stock market or those who pay little attention to the financial goings on in our country may have heard the term “stock options” in the past and not fully understood what it meant. The assumption that many people make is that stocks and options are the same thing when, in fact, they are completely different animals. A lot of the horror stories you may have heard of people losing their life savings on the stock market may have had more to do with options than with actual stocks.
Puts and Calls
Stock options are sold in two types which are called puts and calls. Both are sold with an expiration date and at a fixed price which is referred to as the strike price. When you buy options you are basically gambling on what the stock will do before your option expires. When you buy a call option you have the right (but you are not obligated) to purchase stock at the strike price anytime before the option’s expiration date. Conversely, when you purchase a put option you have the right (but are not obligated) to sell stock at the strike price anytime before the option expires. In the case of a call option you’re hoping that the price of the stock climbs well above your strike price, allowing you to buy stock that’s trading at, say, $150 per share for a strike price of, say $90 per share. This leaves you free to turn around and sell those shares for a nice profit. With put options you’re hoping that the price drops well below your strike price, allowing you to sell shares for more than they’re trading for. It really is a gamble and it is very easy to lose money this way.
Actual stocks differ from options because when you buy stocks you are buying an actual piece of a corporation. You own something tangible and can be paid dividends if the company is doing well. While many people use the stock market as a way to try and make a quick profit, buying shares and holding them until the price goes up then selling them for a profit, it can also be considered a long term investment. Stock options, however, are always a short term gamble. Any poker player will tell you that if you gamble long enough, sooner or later you will lose.