Difference Between a Share and an Option

For a newbie the stock market can be overwhelming. Apart from thousands of stocks to choose from there are also different type so financial instruments that you can look into. This is on top of all the research you have to do to be able to make money. And even with all that, in a highly unpredictable stock market, your still not guaranteed to have en early retirement. Apart form shares, options are another financial instrument you can buy.

When you purchase a share, you take ownership of a certain part of a company. You don't have control over the company's day to day business but you are entitled to the distribution of profits through dividends.

Options on the other hand, is a contract gives you the right to buy or sell a share at a certain price and date. Its a type of security that has defined terms and properties. For example, you want to buy a vintage car for $150,000 but you don't have the money to pay for it. You negotiate with the owner to buy the car in 2 months, and fork over $2,000 for this option. Now two other situations may arise in this situation. The car is actually worth more than it is - a discontinued limited edition that stands to earn you more than $1 million in auction. On the flip side, upon a closer inspection, you find hidden engine problems and numerous other signs of wear and tear that will costs you effort, time and money to repair. You have the choice for the option to expire, but you lose all your investment. Options also derive their value on something else, such as a stock or index, in this situation its the value of the car.