What is the difference between a put and a call on the stock market?


Quick Answer

Call and put options both give investors the right to conduct a transaction in the stock market at a specific price, as Investopedia explains. Call options provide the right to purchase a stock at a particular price and put options allow investors to sell at a previously agreed price per share.

Continue Reading
What is the difference between a put and a call on the stock market?
Credit: Andrew Burton Getty Images News Getty Images

Full Answer

Call options do not obligate the investor but put options do, as Investopedia reports. Investors may use options before they expire and must pay a price for and own the option before exercising it. If the stock is believed to be going to increase in price, investors may wish to purchase call options to preserve the ability to buy at a lower price. The possibility of falling stock prices generally encourages investors to purchase put options.

In principle, call options have a higher potential return on investment than put options because stock prices can increase infinitely but can only decrease back to zero, as Zacks Investment Research claims. The value of call options decreases as the option approaches expiration. Contract writers sell options with the intent of profit and must set aside funds to purchase stocks back from the investor if a put option is exercised. Both contracts may be held until expiration if the stock prices are expected to change in the option owner's favor.

Learn more about Investing

Related Questions