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“This is sasha of de cough and welcome to investing helpdesk comm. Where i answer. Answer. Some of your frequently.
Asked questions about trading and investing so this week s is is it better to trade options or stocks. What is your preference. So first off let s talk about the options attraction. Why are many people attracted to options.
Well the reason. Why many people are attracted to options is typically because of their account size. I find that many people who have a smaller account size are attracted to options. Because of leverage.
So they assume that they can trade larger or use that leverage to make more and accelerate the growth process to their account. Now you want to pay close attention to this have some caution. Because it s not always the best move to put a 16 year old new driver inside a 500 horsepower. Ferrari and this is what people do with trading options they really go a lot quicker and leverage things up faster than what they should be they need to first build experience and then move into options.
But many people want to jump into options because they think they can grow their account. Larger remember that you re trading with professionals. When you trade now..
There are some advantages when it comes to options for example trading options can give you advantages like time decay meaning you can capitalize as options decay by selling those options you can create spread strategies that you can t do with stocks so you re allowed to create a lot of different variations that you just can t do when you re just trading stocks directionally and finally of course leverage. Now there s other advantages as well. But that s beyond the scope of this video now there are some also disadvantages with options so sometimes volatility and lighter liquidity in certain options can be a problem and of course not to mention the learning curve that goes along with options is just much higher. There s much more to learn when it comes to options than there is with stocks.
However this will give you some base guidelines behind some of those advantages and disadvantages. So. What s the final verdict. Well it comes down to what you like better.
And what works for your to reward tolerance your style and your goals certain people love trucks. Others like hybrid vehicles. Some people just love motorcycles. So i always say do what works for you personally because i m not you the person down the street isn t you and your friend isn t you you need to do what works for you and your style your goal your risk and reward strategy.
It s one of the reasons why you don t see a tennis player going into mixed martial arts right away because they re not interested in contact sports or a hockey player jumping into golf. It s very rare that you see those transitions so you need to find what works for you for your pace and your trading style. Because there s a lot of different ways that you can trade. But you still might be wondering.
What is it that i like so i ll give you some insight. I personally prefer to trade index options like the spy qqq spx. Iwm r ut and my personal accounts because of the 1256 contract tax code which you can do some research on..
But i ll give you some insight here now in my ira account. I will trade any stock or options depending on preference until you are taxed a little bit differently typically those taxes are deferred towards when you take money out of those accounts or pre taxed. If you re doing like a. Roth ira or something to that effect.
So. What is this 12. 56 tax code and contract code well first off. I want to make sure that you understand that this is a disclaimer that i m not a tax advisor.
So you may and should contact your accountant tax advisor regarding your personal taxes and your situation. But this is just my personal sascha s take on the tax code. And why i like trading the way that i trade based on some of these taxes so one of the main advantages is this 1256 contract tax code. So in this what it states is basically sixty percent including date rates are taxed at the lower long term capital gains tax rate and forty percent are taxed at the short term rate.
Which is the ordinary tax rate. So with twelve fifty six contract tax rate. You have a maximum of twenty eight percent that you can use it so it s 12 percent lower than the top ordinary rate. Which is right around that forty percent rate.
So here s an example that will really start to make sense so the current long term capital gains tax rate is 15 percent. The short term capital. King gains tax is let s say 35..
Percent if a trader makes 80000. In profits. Here s how you re going to be taxed. If you have the 60 40 contract rule so.
First off we take 60 of. 80000 that ll be our 48000. We tax that at 15 because 15 is taxed at the longer term rate this gives us a tax fee of 7200 dollars that we have to pay uncle sam or. The irs then you take 40 of that.
80000 and you get 32000. Now you tax that at the short term capital gains tax. Which is 35 and in there you pay uncle sam the irs eleven thousand two hundred dollars on your eighty thousand dollar profit. So your total between these two is seventy two hundred plus eleven thousand two hundred dollars which gives you about eighteen thousand four hundred dollars on your tax bill at the end of the year which is roughly around twenty three percent on that tax bill.
Now. If you did it the other way just trading stocks. When you had 80 thousand dollars. If you did they trade swing trades.
It doesn t matter you re taxed at thirty five percent. Because the hundred percent of that is going to be taxed at the 35 bracket which will give you twenty eight thousand dollars on your final tax bill. So you can see that it s roughly ten thousand dollars more on your tax bill..
So the difference really is are you going to pay 18 thousand four hundred on taxes on that eighty thousand dollars are you going to pay twenty eight thousand dollars on your eighty thousand dollars in profits and of course. I d rather be or make almost an extra ten thousand dollars simply by just trading index contracts in options in my standard account because you re just going to make all of a sudden that much more at the end of the year. It really just jumps you about another 10 in profits. So i hope that makes sense.
And if you want to see more questions and answers be sure to visit me at investing helpdesk comm. Where you can also reach out to me. And ask other questions. If this video wasn t as clear for you and i ll give you some more examples now.
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I ll ” ..
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