Difference Between Stock and Option

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.

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  • 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 stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company’s owners, but their liability is limited to the value of their shares.read more 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 stockholdersPreferred StockholdersA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more 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 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

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.

Comparative Table

Conclusion

  • 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 appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more.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.

Stock vs. Option Video

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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