As part of our continuing series in which we let two investment opportunities fight for the right to be called this week’s Market Matchup champion, this week, options trading will go up against a tried and true investment, stocks.
For clarity’s sake, we will be including day trading as well as long term holdings when discussing stocks as an investment opportunity.
So, without further delay, let’s get into this week’s matchup!
A Tried & True Investment
For as long as people have been looking towards market exchanges as a viable means of increasing personal wealth, stocks have been one of the top contenders in terms of investments.
Boosting a history that stretches back into the early 1600’s, stock trading has found itself often regarded as the gatekeeper to modern investments.
Though, as markets around the globe begin to contract due to the current pandemic, this old guard may find itself replaced by newer options, pun very much intended.
A breakdown of the stats:
- As of December 2019, stocks were globally valued at over $70 trillion
- Large trading volumes on a daily basis; over half of American adults have invested in stocks
- Low barrier for entry; investors can often start their portfolio with $100 or less
- Widely available knowledge base allows novice traders the ability to learn quickly
- During moments of upswings, offers high potential for ROIs
Now, a look at potential weaknesses:
- Market downturns can result in great losses
- Dependent upon the stock, volatility can greatly affect long-term growth
- Large fluctuations in price can be instigated by traders with large holdings
- While easy to start, the learning curve for expanding investments can become difficult at higher levels
With an impressive ability to earn during both the long and short term, stocks will be a tough competitor.
Though, as the market can be fickle and go against even the most vetted of strategies, the opportunity to lose, as with the investment itself, is still present.
An Option to Leverage Volatility
Options trading, while newer to the wealth game than its competitor, has established itself over the course of its history as a lower risk alternative with higher returns for those that have taken the time to learn its ins and outs.
A breakdown of the stats:
- Offers a lower cost alternative to traditional stock trading when comparing numbers of assets traded
- Reduces risk of loss and acts as a viable hedge to traditional investment opportunities
- Returns often are made at a higher percentage than the traditional equities in which the option is attached
Now, a look at potential weaknesses:
- Has a steeper learning curve when compared to other traditional investment opportunities
- Long term growth is not conducted in the same fashion as stocks or other equities
- No availability of a hold strategy
- Losses can be steep if care is not given to investments
As the new kid on the block, compared to its competitor, options trading offers investors a new opportunity to earn returns without the stalwarts of old money standing in the way.
Though, as options can prove difficult for some beginners, the match will be decided on the merits of those returns.
Round 1: Investment Insulation
For this round, the investments will be judged according to their ability to withstand outside forces, such as market downturns as well global crisis, while still remaining profitable for investors.
So, as an investment opportunity that is tied to market performance, traditional stock trading is at a disadvantage.
As this round is judged solely on an investment’s ability to remain profitable in the face of downturns, options gains a slight lead as investing against downturns is baked into a key strategy for options trading.
Thus, this round goes to options.
Round 2: Possible Profits & Capitalizing on the Moment
As a round dedicated to an investments ability to capitalize on shifts within the market, the winner will need to be poised to take advantage of shifts in either direction to earn profits for their holders.
As stocks abide by the adage of buy low and sell high, they take an early lead in this round as stocks offer savvy investors the opportunity to turn intuitive strategy into returns easily.
Though, options, being based upon equities themselves, offer the same opportunity with inherently less risk.
That being said, as the round is judged on returns and not safety, this one is going to be a tie between stocks and options.
Both investment opportunities allow for volatility to be leveraged into profit if done correctly in their own ways.
Round 3: Banking on the Learning Curve
In the final round, the winner will be determined by an investment’s ease of entry in terms of entering the market as a new retail investor.
This is done by taking into account the necessary funding to begin trading within the market, the steepness of the learning curve, and the potential pitfalls mistakes can wreak on an average investor’s portfolio.
With the first criteria taken into consideration, there is no clear cut winner visible at the moment, as both investments do offer a low cost barrier upon entry for certain trades and holdings.
Moving towards the second point, stocks take an advantage as investors can dump money into an account and acquire positions with very little knowledge, whether or not that becomes a return notwithstanding.
All of which leads us to the third deciding factor.
Given that investors can both easily begin trading within both investment opportunities, the possibility for severe financial ramifications will be paramount in choosing a winner.
While stocks do offer an easy entry, poor choices in positions can often mean an investor’s entire portfolio will become nothing more than a bag to hold if mistakes are made.
Options, on the other hand, while the potential for losses is still present, allow investors the opportunity to learn from mistakes without spoiling their entire ability to continue trading if mistakes prove to have financial losses.
With that slight edging out in the lead, options wins the round by a fraction.
The Final Tally
After three rounds and a healthy dose of deliberation, the winner is…
While not the oldest available method of investing, when taking into account the three criteria of the Market Matchup, options takes the win!
As platforms such as Level01’s very own App allow retail investors the opportunity to capitalize on options trading, expect their place in the average investors growth strategy to increase.
Luckily, for traders that prefer to play it safe and those that want to grow their investment against volatility, the Level01 App allows traders of all levels to utilize their investment in a platform developed with ease of use in mind.
From receiving real time predictions of win/loss ratios powered by AI to the ability to trade options across multiple markets, the Level01 App is bringing DeFi to all.