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Differentiating Common Stocks from Stock Options
You may still be trying to figure out what exactly stock options are and how they are valuable to you. May be you have started reading up and researching how stock options can best fit your investment plans. May be you are still confused with what stock options are and what stocks are. If you are, then you have certainly found the right spot to enlighten you in your stock options predicament. I give you the main differences between common stocks and stock options.
I guess the most obvious distinction between common stocks and stock options are their purpose and their definition. Stocks that are commonly traded represent a fractional ownership in a corporation. When you buy shares of stock of a corporation you become a stock holder of that corporation and an owner of that corporation. This means that you get to have dividends or your share of the corporation's profits. In buying stock options you do not become an owner of the corporation. Neither can you receive quarterly dividends or profits. When you buy a stock option, you are actually buying the right to buy (or sell) shares of stock at a fixed price within a fixed period. So when you buy a stock option you are buying the choice of maybe buying shares of stock. You do not immediately own the shares of stock.
Another main distinction between common stocks and stock options are their shelf life. Ownership of stocks is indefinite and can last as long as you don't sell your shares of stock. You can hold on to your stocks for as long as you want and no one can take them away from you. Ownership of stocks has no expiration date. Stock options on the other hand are time bound and can expire. You do not own stock options indefinitely. They are subject to the expiration period that forms part of the stock option. Once the expiration period passes, your ownership of the stock option also ceases.
Since stocks represent ownership of a corporation, it is limited by the valuation of the corporation. This means that there are only a finite and fixed number of stocks that are available for buying and selling. Stock options, on the other hand, are not as fixed as shares of stocks are. Stock options are sold by writers and bought by holders. There can be as many stock options as there are as many sellers and buyers that are willing to buy and sell stocks. This is why there can be no fixed stock options.
One of the biggest differences between stocks and stock options is the fact that when you buy stocks you receive a stock certificate that serves as proof that you own a company's stock whereas when you buy stock options you are not given a stock certificate. Instead, a stock option buyer or seller is given a statement prepared by the brokerage firm that shows options position. This innovation in giving certificates reduced the paperwork involved and the delays in stock options as compared to stocks.
I hope that this little comparison helped you in understanding stocks and stock options more.
I guess the most obvious distinction between common stocks and stock options are their purpose and their definition. Stocks that are commonly traded represent a fractional ownership in a corporation. When you buy shares of stock of a corporation you become a stock holder of that corporation and an owner of that corporation. This means that you get to have dividends or your share of the corporation's profits. In buying stock options you do not become an owner of the corporation. Neither can you receive quarterly dividends or profits. When you buy a stock option, you are actually buying the right to buy (or sell) shares of stock at a fixed price within a fixed period. So when you buy a stock option you are buying the choice of maybe buying shares of stock. You do not immediately own the shares of stock.
Another main distinction between common stocks and stock options are their shelf life. Ownership of stocks is indefinite and can last as long as you don't sell your shares of stock. You can hold on to your stocks for as long as you want and no one can take them away from you. Ownership of stocks has no expiration date. Stock options on the other hand are time bound and can expire. You do not own stock options indefinitely. They are subject to the expiration period that forms part of the stock option. Once the expiration period passes, your ownership of the stock option also ceases.
Since stocks represent ownership of a corporation, it is limited by the valuation of the corporation. This means that there are only a finite and fixed number of stocks that are available for buying and selling. Stock options, on the other hand, are not as fixed as shares of stocks are. Stock options are sold by writers and bought by holders. There can be as many stock options as there are as many sellers and buyers that are willing to buy and sell stocks. This is why there can be no fixed stock options.
One of the biggest differences between stocks and stock options is the fact that when you buy stocks you receive a stock certificate that serves as proof that you own a company's stock whereas when you buy stock options you are not given a stock certificate. Instead, a stock option buyer or seller is given a statement prepared by the brokerage firm that shows options position. This innovation in giving certificates reduced the paperwork involved and the delays in stock options as compared to stocks.
I hope that this little comparison helped you in understanding stocks and stock options more.
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