Stock trading and options trading are two popular forms of trading in the stock market. Though they may appear the same, there are considerable differences between them on several aspects. Knowing these is essential for informed decision-making.
What is Stock Trading?
Stock trading involves buying and selling stocks of companies listed on stock exchanges. When you purchase a stock, you own a part of the company. Stocks are primarily traded in two ways:
- Intraday Trading: This form of stock trading involves buying and selling on the same day. You buy a stock, its price increases, and you sell it. The price difference is your profit. Intraday trading aims to capitalise on short-term price fluctuations. Intraday trading involves constant market monitoring.
- Delivery Trading: Delivery trading involves buying stocks and holding them for a long period. The holding period could be weeks, months or even years. Delivery trading aims to benefit from capital appreciation and dividends that the company may pay to its shareholders from time to time. It’s more suitable for those who want to play the waiting game in the stock market.
What is Options Trading?
Options trading is a part of the derivatives market. Through this, you trade contracts that derive their value from the underlying asset. Depending upon their nature, the contracts give you the right to purchase or sell an asset at a predetermined price within the set timeline. There are mainly two types of options:
- Call Option: Through a call option, you have the right to buy an asset at a predetermined price
- Put Option: Through a put option, you have the right to sell an asset at an agreed upon price
Options trading can be complex. However, with the right strategies, they can potentially give you higher returns on your investment.
Differences Between Options Trading and Stock Trading
The table captures key differences between options trading and stock trading on several parameters:
| Parameter | Options Trading | Stock Trading |
| Ownership | In options trading, you trade contracts and not real stocks or shares. There’s no ownership in it. | You own a company’s part when you buy stocks. In other words, it gives you a sense of ownership. |
| Risk and Reward | Highly risky and quite complex. However, if done with prudence, it can be pretty rewarding. | Risk is limited to the capital invested. However, the rewards depend upon the performance of the stock. |
| Capital Requirement | The capital required can be relatively more than stock trading. However, it allows you to leverage funds from your broker to amplify your buying power through a margin trading facility. | You can start with limited capital. However, the requirement can be high for high-value shares. |
| Complexity Involved | It can be quite complex to understand, especially for beginners. | Relatively easy to understand and can be a good starting point for those who want to dabble in stock market investing. |
| Market Conditions | With the right strategy, options trading can be profitable in both volatile and stable markets. | Stock trading can be more profitable in trending market conditions. |
| Hedging Capabilities | Options trading can offer great hedging for existing positions against market risks. | Stock trading has limited hedging options. |
Options Trading or Stock Trading: What Should You Choose?
Now that you know the differences between options trading and stocks trading, the question is whether you should go for the former or the latter. There are certain things you need to keep in mind before choosing either.
Risk Tolerance
This is one of the primary things to factor in before opting for options trading or stock trading. If you have a higher risk tolerance and can digest stock market vagaries, you can opt for options trading.
On the other hand, if you have a relatively low risk tolerance and want to test the waters before committing, you can opt for stock trading. In stock trading, you can opt for large-cap stocks to start with, as they are more stable and can better weather market volatility.
Level of Knowledge
While both options trading and stock trading warrant considerable knowledge, the complexity of the former makes it more suitable for those with extensive stock market knowledge and the acumen to predict future prices.
On the other hand, stock trading is relatively more straightforward, and you need to understand company fundamentals, among several other things, to make the right choice. If you are looking for simpler strategies for wealth creation, you can opt for stock trading.
Expertise in Risk Management
Risk management is a critical element of stock market investment. As markets are inherently volatile, you must implement proper risk management strategies.
Options trading, which are more complex to navigate, warrant better risk management practices than stock trading. If you’ve higher risk management expertise, you can opt for options trading. Else, you can opt for stock trading.
Conclusion
Options trading and stock trading can be rewarding if done right. Irrespective of your chosen one, make sure to do your homework correctly. Equally important is to ensure that you do not get carried away and cut your losses if things go wrong. Make sure to understand the dynamics well before proceeding and seek professional help if needed.
HDFC SKY offers a robust platform that can help you conduct options trading and stock trading with ease. You can open Demat account in a few simple steps and trade in derivatives and stocks at a competitive price point. With a gamut of financial instruments available, HDFC SKY allows you to easily diversify your portfolio. Download now to kickstart your investing journey.
