Stocks and stock options are financial instruments used to invest in companies, but they work in different ways.
Stocks, also known as shares or equities, are a form of ownership in a company. When you buy a stock, you become a part owner of the company.
That means you have a claim on a portion of the company’s assets and earnings. The earnings can come from the stock going up and increasing your investment value or dividend payment.
Not all companies pay dividends, however, so keep that in mind depending on what strategy you want to take for your portfolio.
The price of a stock can fluctuate based on a variety of factors, including the company’s financial performance, industry trends, and global economic conditions.
Ways to get paid with stocks as a beginner
As a stockholder, you can profit from a rising stock price by selling their shares for a profit or by receiving dividends, which are payouts of a portion of the company’s profits as stated.
If you are buying for dividend payments, for example, the stock price doesn’t matter much, but of course, you still want to buy it when it is undervalued. Buying any asset at a lower price giving yourself room for gains is always a good thing.
* For example, suppose you buy 100 shares of XYZ Corporation for $50 per share. You have invested $5,000 in the company, and you now own a stake in the company.
* If the stock price goes up to $60 per share, you could sell your shares for a profit of $1,000 (100 shares x $10 per share increase).
*Alternatively, if the company decides to pay out a dividend of $1 per share, you would receive $100 in dividend payments (100 shares x $1 per share dividend).
How are stock options different from stocks
Stock options, on the other hand, are contracts that give the holder the right (but not the obligation) to buy or sell a specific amount of stock at a specific price, known as the “strike price,” for a certain period of time.
There are two types of stock options: call options and put options.
Call options give the holder the right to buy a stock at the strike price, while put options give the holder the right to sell a stock at the strike price.
Stock options are often used as a way to speculate on the future price of a stock, or as a way to hedge against potential losses.
* For example, suppose you buy a call option on 100 shares of XYZ Corporation with a strike price of $55 and an expiration date of six months from now.
*If the stock price goes up to $60, you could exercise the option and buy the shares at the strike price of $55, and then sell them for $60, making a profit of $500 (100 shares x $5 per share increase).
*Alternatively, if the stock price goes down to $50, you could let the option expire, and you would only lose the amount you paid for the option.
In summary, stocks are ownership stakes in a company that can be bought and sold on the open market, while stock options are contracts that give the holder the right (but not the obligation) to buy or sell a specific amount of stock at a specific price for a certain period of time.
