Trading Versus Stock Trading
Stocks give you a small piece of ownership in the
company. Options are just contracts that give you the right to buy or
sell the stock at a specific price by a specific date. This is the main
difference between stocks and options. There are always two sides for
every option transaction: a buyer and a seller. For every call or put
option purchased, there is always someone else selling it.
By buying a stock, a trader may loose the maximum (all
invested into stock funds) if the underlying company bankrupts. It does not
likely happen over night and stock buyer trading risk is not big. If a stock
buyer buys ETFs shares (index shares) the trading risk becomes even less,
since index shares tracks underlying index that even theoretically cannot
drop to zero. Stock selling is more risky in comparison to the stock buying.
It involves certain margin requirements. A stock seller could be pressed to
closed position by margin call and stock seller can loose more than he/she
received for the sold stock.
involves a much grater risk then the stock trading. The maximum potential
loss for buying options is 100% of the premiums paid for those options. On
the other hand the maximum loss for selling options is theoretically
unlimited and as a rule options seller is bound by much stronger margin
requirements than the stock seller.
The potential gain from the options trading is bigger in
comparison to the potential profit from the stock trading. The options
portfolio has potential to grow much faster, however, the price for that is
a much grater risk.
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