Stocks Trading and Derivative Trading are two different types of financial instruments, serving different purposes in the stock market. A stock represents the ownership in a company while a derivative refers to a financial contract whose value is derived through an underlying asset, i.e. stock.
In this blog, we’ve delved deep into the difference between stock trading and derivative trading. Without any further delay, let’s begin the comparison !!
What is Stock Trading?
Stock trading, also known as equity trading, refers to buying and selling the shares of a certain company and transferring a part of ownership to the investors or stockholders.
Companies enlist their shares on the stock exchange(s) to generate the capital to sustain the business operations and expand the business.
It is one of the best ways to generate funds for the company and for investors to take part in their growth.
What is Derivatives Trading?
Derivative trading refers to a formal contract that helps a trader to buy and sell the underlying asset for a future date. It includes assets like stocks, indices, exchange rates, commodities, currencies, etc.
This type of trading can help you make a profit by investing your money in the future value of an asset. Most of the stock trades occur through an exchange just like stocks.
What is the Difference Between Stocks Trading and Derivatives?
Stock trading and derivatives trading consist of different risk factors and variances. Listed below are the major differences between both.
| Aspect | Stock Trading | Derivative Trading |
| Ownership | Gives you ownership of a company | No grant for ownership |
| Purpose | Used for long-term investment purposes | Help you with short-term speculation, hedging, or arbitrage |
| Returns | Through dividends and growth of the company | May expect higher returns as well as losses |
| Risk | Less risky than derivatives; it may be subject to market risk | Highly risky due to complexity and leverage |
| Holding Period | Long-term or short-term | Short-term |
| Voting Rights | All the shareholders have voting rights | Doesn’t allow voting rights |
| Complexity | Easy-to-understand and invest | Requires you to have a good understanding of contracts and markets |
Stock Trading vs Derivative: What to Opt For?
To choose between stock trading and derivatives trading, you must consider your goals and objectives. Below, we’ve mentioned all the necessary factors that will allow you to opt for one of the trading options.
For Stocks Trading:
- You should want to have long-term ownership and generate a potential income from dividends or wish to trade it.
- You must be comfortable with the volatility and ready to hold the stocks for an extended period.
- You may be seeking a part of ownership and voting rights in a company.
- You’re looking for an easy and straightforward investment option.
For Derivative Trading:
- You are an experienced trader and very well understand the complexities of the market.
- Looking to speculate on short-term fluctuations and hedge against specific risks.
- You’re comfortable with the leverage and ready to accept the potential gains and losses.
- You already have a specified trading strategy, including options, futures, or other derivative contracts.
To Wrap Up!
As a potential trader, you must understand the difference between stocks and derivatives to make informed financial decisions. Both have their own risks and opportunities hence choosing a trusted and the best trading app is critical before starting your trading journey in stocks or derivatives.
Hey, this is Johny Sehgal. I am the owner and caretaker at Finance Jungle. I completed my education in BSC and now heading towards the digital marketing industry. I usually have interests in reading, playing games and watching movies. I also love to write content based on quality information. The main motive of mine is to provide the top and best quality information to my readers. Finance Jungle is the blog for the same.
