The stock market is full of different trading opportunities, which you can choose as per your trading style, risk appetite, and other preferences. You can trade in equities, commodities, as well as indices on a stock trading app. You can also trade in the derivatives of all these financial instruments via the Futures and Options segment. In this article, we are going to walk you through the two most popular ways of trading in the stock market – options trading and stock trading.
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What is Stock Trading?
Stock market trading refers to the trading of equities of a company. You can place a trade in the stock market when the share of your choice is trading at price levels matching your expectations.
In this, all you need to do is place a buy or sale bid on a stock trading app, and you are done. After the successful completion of the trade order, you receive the shares in your Demat account. If you had placed a sale bid, the shares move out of your Demat account when the trade is completed.
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What is Options Trading?
Options refer to contracts wherein you have the right but no obligation to buy or sell the shares of an underlying asset at a predetermined price at a predetermined rate. Options basically represent a price expectation and have no value of their own, unlike stocks.
Options contracts are of two types – Call and Put. A Call is an Options contract that gives you the right to buy an underlying asset, whereas a Put gives you the right to sell them at a strike price by the date of expiry of the contract.
Let’s understand this better with the help of an example –
Mr A believes that the price of a certain stock currently available to him at a price of INR 100 will go up in the future. So, he buys a call option of strike price INR 110 on an options trading app. Let’s say the call is priced at INR 5 during the first week of the month and is set to expire at the end of the same month.
Now, if the price of the underlying stock jumps up to INR 120 on the day of expiry (of the option contract purchased), then the call option, in this case, will be priced at INR 10 (New Underlying Asset Price – Strike Price), which is double the price at which Mr A bought it. Hence, he will make a profit of 100% on this trade.
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Which is Better for you: Options Trading vs Stock Trading
- Stocks require analytical skills but options require even more work. The former is a better choice for the ones with less experience.
- If you are looking for a long-term investment, go for stocks! Options are basically for those who are looking for gains in a relatively shorter period of time.
- If you do not wish to put in a lot of money but also want to take a big position in the market, go for options as they are available at much lower prices than stock and allow you to take the same position.
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Conclusion
Before entering the stock market, one must gain full knowledge, be it for equities or options. You should know what they mean and how they function as the minimum to begin with. Also, avoid acting out of greed or fear. Always trade after completely assessing both the risk and the reward and with a calm mind.
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