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In Finance, options and stock or equities fall under the security category. A security is a negotiable instrument representing a financial value. There are two types of securities: debt securities (bank notes, bonds) and equity securities (common stocks)
Even though stock and stock options are classified under the same broad financial term that is security, they are very different beasts.

- Stock:
An Equity share/stock gives ownership to its holder of a piece of a company or corporation.
Those shares are listed and traded on the Stock Market.
There are commonly two types of share: common stock and preferred stock.
Common Stock: the shareholder is given the right to participate in the corporate decisions via a voting system. The more share in the company one owns the more influence one has.
Preferred Stock: do not carry a voting right but the shareholder is legally entitle to a specific amount of dividends, unlike the common stock holder. A convertible preferred stock is a preferred stock that allow the owner if he chooses to convert the preferred shares he holds into a predetermined amount of common stock after a set date.

- Options:
Options along with Futures are part of a financial instruments called derivatives.
They are called stock derivatives because their value depends on the underlying security.
An option is in fact a contract between two people (buyer and seller) that allow the buyer, but do not obligate him, to buy or sell the underlying asset ( stock or stock index) at a later date at a specific price regardless of the current share value on the Stock Market.
A premium is then paid by the buyer to the seller for privilege given.
There are two types of options:

Call Option:
The option holder is given the right (not the obligation) to buy the underlying security.

Put Option:
The option holder is given the right (not the obligation) to sell the underlying security.
Now, remember that options are contracts. Therefore the amount of money that one can sell for or buy for has been predetermined as well as the date of expiry. If the owner chooses not to exercise his right by the set date, then the contract expires and he loses his entitlement to the premium.

The risk associated to trading is far greater than the dealing of equities. Imagine that you have to pay all the agreed money to buy a share that has become worthless (put option exercised).
But it also true that the potential profits are unlimited.
Options are very elaborate financial tools therefore it is preferable for beginners to stay away until they come to grasp with the system.
Like their counterpart, options are listed and traded on the futures and options exchange markets.

Learn more about this author, Catherine Perez.
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