Stock vs Option

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Stock and Option

The key difference between stock and option is that stock represents the shares held by the person in one or more companies in the market, indicating the ownership of a person in those companies without the expiration date. In contrast, the options are the trading instrument representing the investor’s choice for buying or selling an underlying asset based on the option type to be executed before the expiry date.

Stock as an investment product is to invest in a company’s shares directly by buying that particular company’s stock. Thus, it represents part ownership in a corporation and entitles you to part of that corporation’s earnings and assets. Corporations issue stock, usually in two varieties: Common stocks and Preferred stocks.

Stock-vs-Option

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On the other hand, a stock option is a privilege/option sold by one party to another. It gives the buyer the right, but not the obligation, to buy or sell a stock (exercise the option) at an agreed-upon price (strike priceStrike PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more) within a certain period (expiration date). Options are typical of two types: Call options and Put OptionsPut OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated.read more.

  • An option is considered a call when a buyer enters into a contract to purchase a stock at a specific price by a specific date.
  • An option is considered a put when the option buyer takes out a contract to sell a stock at an agreed-on price on or before a specific date.

Stock  vs. Option Infographics

Stock Purchase vs Stock Options

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Stocks vs Options Video Explanation

 

Key Differences

  • It is similar to 2 persons betting against each other on future stock value. The person who speculates that the stock price will go down would sell called stock Options (known as writing options) to the other person (option holder) who speculates that the stock price will go up.
  • It allows the buyer to buy the stock at a fixed price, no matter how much the stock’s value appreciates during the purchase. Then either sell the call options to another buyer at a higher price or exercise the right vested in the call options to buy the stock from the seller at the lower agreed price. Thus the buyer benefits from the appreciation through the option but does not own the stock yet.
  • Also, Stock options are used as a risk management tool where they act as insurance policies against a drop in stock prices. At the cost of the option’s premium, the investor has insured themselves against losses below the strike price. This type of option practice is also known as hedgingHedgingHedging is a type of investment that works like insurance and protects you from any financial losses. Hedging is achieved by taking the opposing position in the market.read more.
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Comparative Table

ComparisionStock PurchaseStock Option
OwnershipStock Purchase represents ownership in the company.

 

The stock options represent a stock’s choice to buy or sell (depending on option type).
Dividend/Voting rightsShareholders receive voting rights in important company matters and a share of the company’s dividends (if any).Stock option holders received no dividend and also did not enjoy voting rights.
ExpiryThe stock of a company does expire until the company exists. In this aspect, the stock is an asset.Options expire at a date in the future called the expiration date, after which point the investor no longer has the choice to buy or sell. In this aspect, the option is an expense if they expire out of money (loss).
ValuationStock Prices are based primarily on market forces and company fundamentals such as the company’s earnings outlook, the success of products, etc.Stock option prices are based to a large degree on the price of the underlying stock, time to expiration, and other factors.

 

Trading/Investment Stock is an investment instrument that can be sold to another investor at any time.The option is a trading instrument and cannot be traded past the expiration date.
 

Risk

 

Possible to lose the entire principal invested, and sometimes more.As the holder of an option, you risk the entire amount of the premium you pay. But as an options writer, you take on a much higher level of risk. For example, if you write an uncovered call, you face unlimited potential loss since there is no cap on how high a stock price can rise.

Conclusion

Stock vs. Option Video

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This article has been a guide to Stock vs. Options. Here we discuss the top differences between Stock and Options, infographics, and a comparison table. You may also have a look at the following articles for gaining further knowledge –

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