When it comes to trading stocks and listed options, the UK has a well-developed market that offers investors a variety of choices. Both investment methods have pros and cons, but which one is right for you?
To start with, let’s take a look at what stocks are. It is a share in the ownership of a company. When you purchase shares in a company, you become a part-owner of that company, and you are entitled to vote on important matters, such as who will be the company’s directors. You may also receive dividends if the company pays them out.
Firstly, understand that stocks represent an ownership stake in a company. At the same time, options give you the right, but not the obligation, to trade a specific number of shares at a predetermined price within a set period. It is an important distinction, as you can use options to hedge against risk, whereas stocks cannot.
Two main types of stock
The two main types of stocks are: common and preferred. A common stock gives the holder voting rights and priority over other shareholders in the event of a liquidation. Preferred stockholders have no voting rights, but they do get paid before common shareholders in the event of company liquidation. In turn, preferred shareholders are entitled to dividends before common shareholders.
In the UK, you can purchase stocks from one of the many marketplaces dedicated to selling them through an online broker with whom you hold an account.
The most popular marketplace for this purpose is called the London Stock Exchange (LSE). The LSE is owned by a company called LCH Ltd., which provides clearing and settlement facilities in addition to its exchange services. When you buy/sell stocks on the LSE, your orders go through LCH Ltd.’s electronic trading platform, MTSS (Marketplace Trade Services System).
On the other hand, listed options are a type of security that gives the holder the right to buy or sell a certain number of shares of the underlying stock at a pre-planned price on or before a specific date. The key difference between stocks and listed options is that you become a part-owner of the company and have voting rights, while with listed options, you only have the right to purchase shares at a set price.
Two types of listed options
The two types of listed options are: American and European. American options can be exercised at any time up until expiration, while traders can only exercise European options on the expiration date. Listed options are traded on exchanges such as the Chicago Mercantile Exchange (CME) and the International Securities Exchange (ISE).
Another key difference is that you can trade options on margin, which allows you to invest less money than you would need to purchase the underlying stock outright. For example: if you were to buy 100 shares of a company, and that stock was currently trading at $100 per share, it would cost $10,000. However, with an option contract for the same share price costing $7 ($700), you could instead buy seven options contracts (7 is derived by multiplying 100 x $0.70).
Listed options in the UK tend to come in either ‘call’ or ‘put’ varieties. Call options give their owner the right to buy the underlying stock at the stated strike price on or before the expiry date. In contrast, put options do just the opposite – giving their buyer the right to sell shares at a predetermined price within the set period. Again, this is important because while stocks can’t be sold short, options can.
Whether you should buy stocks or listed options depends on your goals. The most significant difference between them is that you gain full ownership of a company with stocks, while with listed options, you only have the right to buy or sell shares at a set price.
When it comes to trading stocks and listed options in the UK, one crucial thing to remember is that it’s essential to understand your personal goals before choosing one method over another. You may decide that listed options aren’t suitable for you after all – but if you consider which one you think will generate more profit than the other, there’s no reason why both shouldn’t work well together.
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