Options Trading vs. Equity Trading: 4 Pros and Cons

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As a new investor, you’re looking into all sorts of ways to make money. What matters to you is determining the steps needed to achieve real wealth without having to risk it all. That’s why you’re looking into both options trading and equity trading.

While each one has its advantages and disadvantages, you must do your research to see which one works best for you. You may even find you should utilize both in your investment portfolio. Depending on your goals, how much time you have, and the level of risk you want to take will determine whether options trading, equity trading or both are best for you.

The first part of your journey is to discover what options trading and equity trading actually mean. Let’s take a look at the definitions of each.

What Is Options Trading?

Options trading takes place on the options market, and investors buy options, also known as contracts. With these options, a seller gives a buyer the right, but not the necessary obligation, to sell or buy a specified amount of shares at a predetermined price point during a defined time period. Options are also known as derivatives because their value is derived from how much an underlying instrument is worth. The underlying instrument may be an exchange-traded fund (ETF), stock, bond, foreign currency, or other security. You can only buy a whole contract, and not a fractional one.

The way options trading works are you can buy either a put option or a call option. If you believe the asset is going to increase in value, you will buy a call option, which gives you the right to buy the option at the strike price, or the predetermined price, within that designated time period. If you think that the asset will decrease in value, you will buy a put option. You will be given the right to sell shares at the predetermined price before the contract expires.

Usually, contracts are six months long, and they will expire on Fridays. Though you can give up your option at any point, you shouldn’t wait too long to the expiration date, because it is a deteriorating asset. The closer you are to that date, the more money you may lose.

What Is Equity Trading?

Equity trading is the more traditional form of investing you’re likely already familiar with. It involves buying equity in a company (or a share) on the stock market. Equity trading is mostly done on the big markets, such as the New York Stock Exchange (NYSE), the S&P 500 Index, and Nasdaq.

To purchase your stake in a company, you determine how many shares you want to buy, and then use a trading platform like E*TRADE or Ally to find the company you want to invest in. There, you can see how many shares you can purchase of common stock or the stock that companies make available to the public. When you buy a stake, you are entitled to the information available to stockholders, like earnings reports. You also may receive payments called dividends, which are a percentage of the stock that you own. They are paid out to shareholders typically quarterly.

Options Trading Pros and Cons

A big pro of options trading is that you can back out of your contract whenever you want. You are never obligated to buy or sell. This means there is the limited risk to options trading.

Another pro of options trading is that you have several ways to trade an option prior to the expiration of the contract. You can exercise the option and buy the shares, sell the contract while it’s still in the money to another investor, buy the shares and then sell some of them to another investor, or make money back on an out of the money option by selling it to another investor before its expiration date.

One of the downsides of options trading is that you have to be able to predict the movement of the option and know when to sell it or buy it. There is more pressure since you’re on a deadline to make the correct move before your contract expires.

If you’re just starting out as an options trading, you’ll need to get experience in it before applying to do it through a brokerage. Then, you’ll need to have a minimum of $2,000 in your account to start trading. There is a learning curve with options trading, and you may lose money at first, which is why it’s advised to start with paper trading initially. Make sure you get practice rounds in before you go on the real market.

Equity Trading Pros and Cons

Just like with options trading, there are pros and cons to equity trading. With equity trading, you will gain money on your investment when the company’s stock goes up, and lose money when it goes down. This is both a pro and a con. You have to use research and background information on a company to figure out when the stock is likely to skyrocket or plummet to shield yourself from risk.

The stock market is riskier than options trading, and you could lose everything. That’s why you have to put aside separate funds specifically for trading, and again, do your research. Consult with a broker if you are confused or don’t know where to place your money.

You can take your money out when you please with the stock market. However, don’t be quick to make a move just because a stock isn’t doing well one day. Slight fluctuations are normal.

A pro of equity trading is that it’s very easy to get started with it, and unlike options trading, there is no big time commitment. All you have to do is sign up with an online broker like Ally or E*TRADE, select the stocks you want to purchase, and then buy them. You can sign up for alerts so you can see when your stock is fluctuating.

A con of equity trading is that Ally, E-Trade, and other brokers charge a fee per share. It’ll range from typically $3.95 to $6.95 per share. The upside is that when you pay for these fees, you’re also paying for access to expert research, helpful charts, and perhaps even a personal advisor. Keep that in mind before deciding on a broker to use.

With equity trading, if you’re going to invest in blue-chip stocks or other companies with high profits and market capitalization, then you’re going to have to save up more than $2,000 to make a substantial investment. Many stocks go for more than that per share. So, unlike options trading, getting into equity trading may require a higher investment.

Since the stock market has a great annual return, you should do well just letting your investments sit there. If you do your research and find out a stock is plummeting, you can take out your money and find a better stock. There is plenty of information available to help you research which stocks are best.

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Finding Out More About Options Trading and Equity Trading with Fast Fortune Club

Now that you know the difference between options trading and equity trading, as well as the pros and cons of each, you can make wise investment decisions. You can choose to do one or both of them to boost your portfolio.

One key piece of succeeding with options trading or equity trading is to keep educating yourself on both. Instead of going to a bunch of different websites – which may not be trustworthy – you can subscribe to Fast Fortune Club.

Fast Fortune Cub is a newsletter-based service that provides you with the latest and up-and-coming information on the best investments you can make. All you need to do is sign up for Fast Fortune Club, check your inbox on a regular basis, and make sure you act on the tips provided by financial expert Tom Gentile. In no time, you’ll be in the money with whatever investing method you choose.

What are you waiting for? Get started with Fast Fortune Club today.

 

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