Stock vs 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.

• Common Stocks: The Common stock is entitled to its proportionate share of a company’s profits or losses. The stockholders elect the Board of Directors. This board decides whether to retain or send some or all of those profits back to stockholders as dividends.
• Preferred Stocks:  These stockholders receive a specific dividend at predetermined times. This dividend ordinarily must be paid before the common stock dividends. If the company goes bankrupt, the preferred stockholders outrank the common stockholders to recoup their investment potential.

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 price) within a certain period (expiration date). Options are typical of two types: Call options and Put Options.

• 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.

• 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 hedging.

• The stock purchase is a traditional investment product where the investor invests in a company's shares and expects returns in the form of dividend and capital appreciation.
• On the other hand, options are a modern-day derivative product where the traders gain/lose on the movement of a stock price value in the future by paying a small premium amount to the writer of the option instead of investing the amount equal to share value.
• So to conclude, they are both important portfolio tools for an investor where stocks are good for long-term investment purposes, and options are best who enjoy the flexibility and reduce the risk by hedging.

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 –

• Buffer Stock
• Exotic Option
• Stock vs Mutual Funds
• Options vs Warrants