Stocks and options may have some
similarities, but they are two different types of investment, especially when
it comes to their risk-reward potential.

And while stocks and
options can be worthwhile investments, each performs better in certain
situations.

Choose stocks when…You Know Enough About
Stock InvestingThe stock selection
process requires in-depth research and proper analysis, but choosing options
will need more than just data.

Before you can even
select options, you must first apply for trading options and be approved. You
can only start choosing options and placing orders to trade them once you
receive the approval. In addition, you would need a margin account and
considerable capital to qualify for options trading.

That’s why mutual funds
or exchange-traded funds (ETFs) consisting of various stocks make a better
choice than options, particularly with beginner and even some intermediate
investors.

You’d Rather Not Follow
the Market

Stocks need to be
monitored from time to time, although the amount of time you need to keep an
eye on them is usually less than what is required by options, which have set
expiration dates.

They’re Volatile

It can be pretty easy
for options to be out of the money (OTM) and expire worthless if you’re rooting
for a particular stock that’s quite volatile. Investing in stocks can provide
you with a permanent stake, but you need to survive the ups and downs, and
that’s often unlikely to happen with options.

You’re Aiming Long-Term

Stocks typically make
significant gains in the long run, although the journey ahead will not be
smooth sailing. That said, options’ short-term nature is more against your
favor during tough times in the market since they can expire before stock
prices start taking the optimistic route again.

Choose options when…You Seek Higher Returns

Like stocks, options
offer a high-reward potential. Still, keep in mind that such a benefit also
carries a serious risk with it. While options could amplify your potential
returns twofold, threefold, or even more, you’re risking losing a lot. And that
could happen in the span of a few weeks or months.

So if you plan to buy
options, make sure you are in a financial position where losses from trading
options can be managed and will not easily drag your capital down should your
trade goes wrong.

You’re Looking to Earn
an Income

Some investors sell
call options against their stock positions or write put options to generate
income. These strategies provide a good and pretty low-risk way to trade
options.

You Want Buy Stocks at
a Discount

Using options to
purchase stocks can help you hold shares at a discount. Instead of buying a
company’s stock directly, you can sell a put option on the stock, which lets
you set a price you’re willing to pay for the stock.

Moreover, you
immediately collect premiums for selling put options, which you can trade to
make an additional profit for your account.

You’re an Experienced
Investor

Options can be risky
and complex investments that first-time investors should avoid, at least until
they have enough knowledge and an excellent idea of what they are doing. Active traders seeking flexibility may
also find a suitable candidate in options.

This article was written by ForexLive at www.forexlive.com.