When learning how to trade stocks, many beginners believe options aren’t much different. However, trading stocks may feel like a walk in the park compared to their counterpart. In reality, stocks are more likely to appeal to neophytes and long-term investors. Meanwhile, options trading is an excellent opportunity for active traders who enjoy flexibility.
While there are some essential differences between stocks and options, they can complement each other in a portfolio. For the beginners who are still wondering where to start, the tips below can help you pick the most suitable alternative.
What Are The Advantages Of Stocks?
Firstly, stocks are an excellent way to start investing in straightforwardly. They are a fantastic option for long-term investment. The best thing about stock trading lies in its simplicity. You can buy a stock to sell at a higher price later on. You can either wait for years or try your luck at day trading.
If you’re just learning how to trade stocks, this method is far better than options, thanks to the hands-off approach. The standard process revolves around researching the stocks you plan to invest in and buying them. Consequently, you can wait for the right moment to sell them when you need the money, or the prices go up enough to make a profit.
What Are The Potential Drawbacks When Learning How To Trade Stocks?
However, there’s a certain level of risk when especially when you’re learning how to trade stocks. The danger is pretty straightforward – typically, when prices plummet to zero. As a result, you can lose your entire investment. The performance of individual stocks can be extremely volatile on a day-to-day basis. That’s why many experts recommend financing stocks with cash that you may not need in the next five or more years. Moreover, don’t take the risk of putting up all your bucks into a single stock. Otherwise, that move may come out costly.
Ideally, your performance may depend on your activity. The amount of money you pay on commission fees and capital gains tax on profits can impact your results too. Generally, commission fees vary, so it’s a wise idea to pick the broker with the best prices. Capital gains tax rates depend on profits from your sales. They relate to the timeframe of stock and income hold. Usually, the cost would be higher if you’ve held a capital for less than a year.
What Are The Advantages Of Options Trading?
Unlike stocks, options have a more tactical approach to investing. If you’re learning how to trade stocks with smaller investment requirements, you should try options. What’s more, they offer higher flexibility in terms of timing and downside risks. The best thing about possibilities has to be the inherently shorter investment timeframe and the expiration dates on the contracts.
Furthermore, options give enough time to see how each trade plays out. For example, you can lock in a price without any obligation to buy. The investing process is a bit more complicated because you have to make three decisions. The first step is to consider the direction of the stock. Then, you must determine how high or low it may move from its current price. Lastly, you must predict when that may happen.
Of course, there are additional strategies for advanced traders. Ultimately, you may have to get familiar with the vocabulary of terms like puts, calls, strike prices, and others. Contrary to popular belief, options aren’t riskier than stocks. Investors can easily let an option expire and incur no financial obligations except the paid and associated costs. Besides, long-term investors can use options as a type of insurance.
What Are The Common Pitfalls?
Still, you can’t have light without a little darkness. Options trading opts for a hands-on approach at nearly all times. If you want to exercise the option before it expires, you should keep an eye on its stock price. Bear in mind that some options strategies are far more dangerous than others. That’s why you should make sure you educate yourself in advance. Also, consider avoiding daily and weekly options as they are more suitable for seasoned traders.
Another disadvantage of options trading is generally higher related costs. Usually, you pay a flat fee per transaction. It can range from zero to $6.95, but you may have to pay a per-contract fee, which covers from 15 to 75 cents. All in all, the more you trade, the higher your costs. Don’t forget the sales fees, too. Similar to stocks, you must factor in capital gains taxes. Moreover, you are to pay taxes on profits, and you may pay extra cash for assets you’ve sold in less than a year.
Finally, choosing stocks or options is an entirely individual decision. Based on your investing style and experience, you may stick to the simple and straightforward nature of stock trading. If you’re into productive investments, you may love options trading.
However, you shouldn’t assume only one means of trading. Just make sure you have a solid foundation of knowledge before you start. What’s more, you should get acquainted with stock trading software and hardware for a smooth and optimal performance. If you intend to buy a trading system, Trading Computers is the best place to get you started. The website has a collection of professional trading machines on display.