Do you understand the Stock Market?
Stocks and Options.
Dear Reader
So, we can begin with what they
have in common. They're both tradable securities. options are tradable and
stocks are traded, they both have bid and ask prices. Options get bid on the
same with stocks and they have asking prices so they're constantly being traded
and they're both listed on the exchanges, the same types of exchanges. Basically,
those are the three main similarities.
Now, as far as differences, the main
difference with options is they have expiration dates. So, think of an option
as a gallon of milk. The moment you place it in your fridge it will begin to expire
(decay) becoming literally worthless as the expiration date approaches. Options
expire over time whereas a stock can be held for twenty, thirty, forty, ninety years;
as long as the company is around but with options there are expiration dates,
also with options there is no set number of options, you can create options out
of air almost and that is one of the reasons why stocks get a bad rap or
options get a bad rap is that there is no set number of options whereas with a
stock you might have 20 billion shares you trade it or give your shares from
one person to the other person, you're buying it or selling it whereas with
options you could just sell an option contract to somebody without really
owning that option it's kind of weird how that works but that's another
difference. Finally, with stocks you own a piece of the company and you have
voting rights with options you don't really own a piece of the company; you're
not really contributing to the company and you have no voting rights.
So, those are three main differences that you must be aware of and some of the similarities but, both stocks and options are very tradable, options do expire but they're used as leverage in order to make more but they're also riskier because you have a time horizon expiration because it works like a coupon that has an expiration date.
Sincerely Yours,
Timothy H.
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