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Stock trading and options are among the best investment opportunities. Many brokerage firms offer both of these services for investors. What are the differences between these two investment opportunities?
A stock is a fraction of ownership in a particular company - how much of something you own at a given time. You could own as many shares of stock in a company as you can afford.
An option is not an actual form of ownership but rather a right to own or trade a certain investment. With an option, you have the right to buy or sell a particular stock at a certain value within a specific time period.
Intrinsic and Derivative Values
A stock’s intrinsic value refers to the actual value of an asset or company. The value relates to how much confidence people have in a company and how well that group is growing. It might also change in value due to news stories or other reports surrounding the stock.
An option is based on the derivative value - the value of the security at a specific time. An option’s value is influenced by the price of the stock and simply adapts to the changes in the stock.
Long or Short-Term?
There are no real rules as to how long you have to hold an option or stock. However, options have an expiry date. That is, an option will have to be exercised within a given time. You can set the specific time period at which the option will expire, thus allowing you to execute a purchase or sale at a certain value at that time period. You can keep an option running for as long as you want. Some options last for an hour. Others could go on for a few days or even a few weeks. Knowing how to choose the right timing for an option is vital to your strategy.
Stocks are different in that you could hold them for as long as you deem necessary. Day-traders often trade stocks many times in the course of a day. This is interesting when you consider the potential for a stock to increase in value over the long-term. For instance, the Home Depot (NYSE: HD) had its stock trading at around $80 during the start of 2014. As of February 2018, that stock has a value of a little more than $185. Day-traders still benefit from changes in the value of a stock within a day. In a typical day, that same Home Depot stock could start at $185 and then move up to $188, down to $186, and then back to $188 at the end of the day.
