Stocks Vs ETFs Vs Options Vs Bonds
By: Ishita Daga
Tags: Bonds, Option, Stocks, Etf, Stock Market

Being a newbie in the finance world, we are often bombarded with these frequent terms. After a lot of research I was finally able to understand these concepts a bit more clearly and wanted to write this article for anyone who has no back ground or knowledge in the world of stock market. I would be giving a brief introduction of what are stocks, Options, ETFs and Bonds, and which one is more riskier than the other.

(P.S. This article is not written by an expert.)

Stocks

In simple words stocks are shares that a company sells and can be bought by anyone who wants to invest in the company. By buying a stock, you basically have a portion or share in the company’s profits or losses. Companies use stocks to gain money which can be used to develop their products, services etc.

The main motivation to buy stocks is that if the price of the stocks rise, you would earn on the investment that you made.

Options

Options is a form of a contract that involves a contract wherein you can either buy or sell X amount of stocks in the future at(or by) a given time. The buyer(seller) promises to pay a premium amount for the options contract. So for example if Anna wants to buy 100 options of a company Z with a premium of 35 cents/stock then Anna has to pay 35$(100*0.35) as a premium fee to get that contract from the option’s writer. Once Anna has the paid the premium she has the option of either selling or buying a security to another party for a specific price sometime in the future.

An option to Buy the share is called Call and an option to Sell the share is called Put. Calls are usually a bet that the strike price of the security will increase, while Put is usually a bet that the strike price will decrease. So for example if the market price of a stock is $50 and Anna is exercising her Call option which has a strike price of $40, then Anna can buy the security at $40, making a profit of $10 on each security.

Bonds

We can think of Bonds as a type of loan that investors give to an organization and in return the organization keeps on giving periodic interests to the investor till the Bond matures(the date by which the loan has to be given). Once the bond has matured the investor can redeem it, and get back the face value from the organization. For example Anna loans 1000$(called face value) to a company Y and in return the company gives her some amount of interest(called the coupon rate) at a periodic interval, until the bond matures. Once the bond has matured, Anna gets the entire 1000$ back.

Bonds are more stable and predictable form of investment than stocks. One scenario in which the they can be risky is when the bond issuer defaults and is unable to pay back his principal amount.

ETFs: exchange traded funds

ETFs is a fund with collection of different investments such as stocks and bonds. ETF’s shares are traded on stock exchanges during the normal trade hours, like normal stocks, and have their own ticker symbols. So basically owning an ETF means you own a share of that pool of investment. Some of them even pay dividends on the securities, just like stocks. Since ETFs have a diverse set of securities, it helps in balancing out the risk. Different ETFs have different objectives and track different assets, for example some focus on stocks and bonds, some track the stock indexes such as S&P 500, and some others focus on a particular market such as pharmaceuticals.

The following posts will talk more about ETFs, index funds and Mutual funds.

Conclusion

In terms of risk, bonds, options and ETFs are more riskier than stocks, but the return from stocks are higher as compared to options and ETFs. Options can be both profitable and non-profitable as compared to stocks. It depends on what kind of Options are we exercising. Call generally provide more gains as the only thing we have to invest is the premium amount, whereas Put can generate a high losses if the premium is high.

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