Equity Vs Options Trading: Which is Better for You?

Equity Vs Options Trading: Equity and options trading are two segments of the stock market. When any beginner enters the stock market, the first question he asks is whether I should trade in equity or trade in options. In option trading, you have the opportunity to make a lot of profit in one trade and at the same time it also has the potential to cause you a lot of loss. 

When we talk about equity, your profit may be small, but as a beginner, you will see very less risk in equity. It’s not that there is no risk in both, there is risk in both. 

That’s why you have to understand where you can start as a beginner or a professional trader, what should be your mindset towards both, how you can become profitable in any of these segments and in this article, we will also learn about the difference between equity and options trading.

What is Equity Trading?

We know that buying shares of a company means buying a small part of that company and in the language of investing, we call this small part equity trading, so we can say that by buying the shares of a company we buy equity in that company.

If you buy shares of any company, you will become a small shareholder of the company, so in this way, equity trading in investing is nothing but the ownership of a company. The company divides its equity into shares and sells it to the public.

The more shares an investor or trader buys in a company, the more equity he has in the company. That’s why stock trading is also called equity trading. Always remember that whenever we buy the stock of a company, so we buy equity in that company. [Equity Vs Options Trading]

Advantages 

• You can take dividends on some specific stocks of equity shareholders which are called dividend stocks and you can earn money from the stock price movement as well as dividends in returns.

• In equity trading, you do not see any expiry but you have to sell the shares on the same day if you do intraday trading but in delivery trading, you can sell the shares anytime. 

• If we talk about liquidity, it’s seen more in equity trading. In equity, you can sell shares anytime if you find sellers. 

• If you buy shares of any company, whether it’s 1, 10 or 1,000 shares, you become a shareholder of that company. 

Disadvantages 

• If you like to take risks or want to make quick profits then this equity trading is not good for you because there is less volatility in it.

• You can’t do short selling in equity trading. You can do short selling only if you do intraday trading in equity.

• In equity trading, you do not get any leverage on delivery trade. 

Read More: Difference Between Intraday and Option Trading

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What is Options Trading?

Options trading gives the right to the buyer but not the obligation to buy (call option) or sell (put option) and underlying asset at a predetermined price before the day of expiry. There are 2 types of options trading:

Call Option: The call option gives the holder the right to buy an underlying asset at a specified price before the expiration date.

Put Option: The put option gives the holder the right to sell an underlying asset at a specified price before the date of expiry. [Equity Vs Options Trading]

Advantages

• If you are an experienced trader and like to take risks then you can do option trading because in this you also get opportunities to make big profits because volatility is very high in options.

• When a trader buys a call or put option during his trading deal, he is not obliged to follow the prices during the entire contract.

• Options are a great way to lower your upfront financial commitment. For a regular trader, the upfront trading amount to purchase a share or any other security outrightly is quite a bit. 

• Options provide complete flexibility to the traders by allowing them to deploy multiple strategic moves before an option contract expires.

• In options trading, you can get higher potential returns and in case you feel that the market will fluctuate with time and the price will go higher, then as a seller, you can earn maximum returns in the coming future.

Disadvantages

• In contrast to an option holder, the option seller can bring about a higher volume of misfortunes, much more than the cost of the entire cost of the agreement.

• If you are an active trader in the stock market, then you might be aware that the brokerage charges in options trading are relatively higher.

• In options trading, you will get lower liquidity, since options are held for certain days or weeks, a stock may rarely experience any higher fluctuations.

• If you do not follow proper risk management in options trading, you can lose all your invested money in a single trade. [Equity Vs Options Trading]

Read More: How to Become an Expert in Options Trading 2024

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Equity Vs Options Trading: Which is Better for You? 

Equity trading is the biggest instrument for a beginner because the risk in it is very low and the volatility is also low due to which you can trade with a calm mindset. If you have a strategy and if you are a beginner and want to understand how the market works, then equity trading is a great segment to scale your account and understand the market. 

If you do intraday or investing in equity, you get 5x margin or leverage. This gives more benefits to beginners or those who come to the market with small or limited capital.

In options trading, you can make a lot of money and also lose it very quickly because it’s very risky. This is because the volatility in options trading is very high. We call options trading high risky because of the premium you buy in it. It can also be zero on the day of expiry.

That’s why options trading is a highly risky or highly volatile instrument that should only be undertaken by professionals and experienced traders who have a very detailed understanding of the market and know how it works and whose strategies are tested. [Equity Vs Options Trading]

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Conclusion 

Options trading is very complex because it works on Greeks and there is a lot of confusion when you go into details. If there is a big movement in the market, it gives a lot of profit and also a lot of loss.

That’s why it’s not at all advisable for a beginner to work in options trading. Now ask any big professional or experienced trader, all the pro traders will say that before doing options trading, you can start with equity trading. 

I hope you have liked the information we have shared in this article, to know more about option trading you can read our other articles too. [Equity Vs Options Trading]

Read More: 12 Best Option Trading Books For Beginners in 2024

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Frequently Asked Questions (FAQs) –

1) Which is more profitable options or equity?

Options are more profitable than equity trading because there is less risk in equity trading and volatility is also less due to which there is less movements. On the other hand, options have high risk as well as a lot of volatility will also be seen due to which you get a lot of movements and you can make more profit in it.

2) Why option trading is risky than equity? 

Option trading is more risky than equity trading because its nature is complex and there is more volatility in options due to which many beginners end up making unnecessary losses, so if you are a beginner then start with equity trading. 

3) Why do 99% option buyers lose money?

99% option buyers lose money because they do not come into the market with proper knowledge and do not follow proper risk management. The nature of option trading is very complex and the volatility is also high, due to which many option buyers lose money. 

4) Can I hold options overnight?

Yes, you can hold options overnight. When you purchase an option you own it until you decide to sell it or it expires.