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 !! 

Stock market app

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.

Topics #Stock market app