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Stocks and options are two of the most popular investment types that investors might include in their portfolio. There are reasons to invest in each, and they both come with their own risks, timelines, pros, and cons.

When deciding whether to invest in stocks vs. options, or any type of security or asset, it’s important to consider your personal investing goals, experience, risk tolerance, and investing horizon.

What Are the Differences Between Options and Stocks?

Stocks represent ownership in a company, whereas options are derivative contracts that give purchasers the right, but not the obligation, to buy or sell shares at a set price before expiration. Note that sellers of option contracts are obligated to fulfill the terms of a contract if a buyer chooses to exercise it.

Options

Options, or stock options, are a type of derivative. Rather than buying shares of a company, options contracts give buyers the right, but not the obligation, to buy or sell shares at a specified price (known as the strike price in options terminology) at a specified time in the future.

A call option gives the buyer the right, but not the obligation, to buy a stock at a specified price, at a specified time in the future. The options investor does not have any ownership of the company’s shares unless they choose to exercise the option and buy the shares.

A put option gives the buyer the right, but not the obligation, to sell a stock at a specified price, at a specified time in the future.

Over the time period of the option, a portion of the contract’s value (its extrinsic value) typically gets exponentially less valuable. This is known as time decay.

Investors may exercise their right to buy or sell a stock, or sell their option position to make a potential profit. Options trading strategies can get complicated, involving buying and selling multiple options on the same underlying security.

Recommended: A Guide to Options Trading

Stocks

Stocks are portions of ownership in companies, also known as shares. Investors can buy shares in companies and become fractional owners of that company in proportion to the number of outstanding shares that company has. For instance, if a company has 100,000 shares and an investor buys 1,000, they own 1% of the company.

Investors who purchase stocks typically hope to buy them at a lower price then sell them later at a higher price to make a profit. There are also other ways investors might earn profits on stocks. For instance, some stocks pay out dividends to owners. Every month, quarter, or year, an investor may receive a dividend payment based on the number of shares they own and the company’s decision to pay out dividends to shareholders.

Recommended: How to Start Investing in Stocks

5 Key Differences in Stocks vs Options

Both stocks and options are popular investments, and there can be a place for both of them in a diversified portfolio. Here’s a look at some of the differences to keep in mind when it comes to trading options vs. stocks:

1. Risk

Both stocks and options have associated risks. For stocks, the risk is that the value of the security may fall lower than the investor expected. For options, there are additional risks, including the risk that they could exacerbate losses or could expire worthless.

2. Ownership

When an investor buys stock, they become partial owners of that company. When they buy options, they purchase the right (but not the obligation) to purchase shares at a predetermined price by an agreed-upon date.

3. Quantities

When buying stock, the number of shares an investor buys is the total number they have, and they can purchase any number of shares, including fractional shares. When buying options, each contract typically represents 100 shares of stock.

4. Timeline

Options are contracts that are only valid until the expiration date. They may lose value over time and be worthless when the contract expires. When an investor buys stock, they can hold it as long as they want.

5. Time Commitment

Investors can buy stock and hold onto it without doing much additional work, whereas options traders are often more hands-on, keeping an eye on the market for the duration of the contract, since options expire on a set date and may gain or lose value over that time period.

When to Consider Trading Stocks

There are several reasons to consider trading stocks, depending on your goals, timeline, and risk tolerance. Like any asset, stocks come with their share of risks and downsides.

Pros

Stocks may be easier for investors to research than options, given that each stock represents a single security with a long pricing history. Options, conversely, often involve complex strategies and require advanced skills. There are several other benefits as well:

•   Investors don’t have to sell their stocks on any particular date, so they can choose when the appropriate time is to sell.

•   Some stocks pay out dividends to investors.

•   Stocks may be easier to research than options since they tend to be less complex than options strategies.

•   Being a shareholder may allow investors to vote on certain corporate issues that could affect their investment.

•   Stocks typically have more consistent liquidity than many options contracts, meaning it may be easier for traders to buy and sell them quickly.

Cons

As with all securities, there are risks involved with investing in stocks. These may include, but are not limited to:

•   Whether you buy and sell stocks quickly as a day trading strategy, or hold onto them for years, you may need to pay short- or long-term capital gains taxes if you sell for a profit.

•   Although trading stocks has the potential to be profitable (as well as high risk), stocks are generally used as part of a long-term buy-and-hold investing strategy for most people.

•   Assuming a level of shorter-term volatility, it can be emotionally challenging to watch the market and one’s portfolio go up and down in value over months or even years.

•   When investing in stocks, traders face the possibility of losing some or all of their investment.

•   Stock prices may be high or low depending on the company, which could make it difficult for smaller traders to buy more expensive shares (unless fractional shares are available).

When to Consider Trading Options

Like stocks or any investment, options come with their share of risks and downsides. Options are often used for leverage, income strategies, or hedging, but they generally require a higher risk tolerance and more active engagement.

Pros

Options trading can be complicated, but there can be significant upside potential. Benefits include:

•   Options provide investors with leverage, which offers the ability to control a larger number of shares of the underlying asset with a relatively smaller amount of capital. While this may amplify potential profits, it amplifies potential losses as well.

•   As a result of leverage, options may require relatively less money to participate in the market, though they come with a potential higher risk of loss.

•   Options may help hedge against market volatility, such as by using protective puts to limit downside risk.

Cons

Options trading is higher risk and involves an advanced skill set. Also, since fewer traders buy and sell options than stocks, there may be lower liquidity, sometimes making it difficult to get out of an options contract. Other drawbacks may include:

•   If the stock does not move as expected and the option expires unexercised, the investor loses the premium paid.

•   Options tend to lose value over time because each contract has a fixed expiration date, and the time component of its price decreases as that date approaches.

•   Trading options may require more ongoing management than stocks because traders must monitor expiration dates, volatility changes, and potential assignment risk.

As mentioned above, options trading involves leverage, which comes with the risk of seeing amplified losses as well as potentially amplified gains.

The Takeaway

Stocks and options are two types of investments traders use to seek potential profits and build a diversified portfolio. Depending on your investment strategy, you may decide to invest in a combination of the two. Note that both have their own associated risks and potential benefits.

Options trading, however, is typically something that experienced investors delve into, generally requiring traders to actively invest, rather than leave their portfolios idle. If you’re interested in options, it may be helpful to speak with a financial professional for guidance.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

What is the fundamental difference between stocks and options?

Stocks represent fractional ownership in a company, which may offer dividends and voting rights. In contrast, options are derivative contracts that give the purchaser the right, but not the obligation, to buy or sell shares of the contract’s underlying asset at a predetermined price (called the strike price) by a specific expiration date. Options trading is generally considered higher risk compared to stock investments.

How does the risk profile differ between trading stocks and options?

While both investments carry the risk of financial loss, options generally involve more complexity and higher risk. For example, the leverage involved in options trading may amplify both gains and losses, and options may expire worthless. Stocks are primarily subject to the risk that the security could lose value, which may result in the loss of principal invested.

Do stocks and options offer the same flexibility regarding time commitments?

No. When an investor buys stock, they can hold those shares indefinitely. Options, however, have a limited lifespan and expire on a specific date, called the expiration date. As a result, options typically require more active, hands-on management from traders to monitor market conditions, the price of their option, and expiration timelines.

Photo credit: iStock/fizkes

SOIN-Q126-028

A 401(k) is a popular way to save for retirement. But not everyone has these employer-sponsored savings plans. For instance, many small companies don’t offer 401(k)s. And self-employed individuals don’t have access to regular 401(k)s.

For those who don’t have access to a 401(k) at work or want to consider other retirement savings options, there are a number of 401(k) alternatives. Read on to learn about how to save for retirement without a 401(k), some 401(k) alternatives, and what you need to know about each of them to choose a plan that aligns with your retirement savings goals.

5 Alternatives to a 401(k)

These are some popular retirement savings plans that are available beyond a regular 401(k) that individuals may want to consider.

Traditional IRA

A traditional IRA (Individual Retirement Account) is similar to a 401(k) in that contributions are not included in an individual’s taxable annual income. Instead, they are deferred and taxed when the money is withdrawn at age 59 ½ or later.

Early withdrawals from an IRA (before age 59 ½) may be subject to an added 10% penalty (plus income tax on the distribution). However the main difference between an IRA vs. 401(k) is that IRAs tend to give individuals more control than employer-sponsored plans. For example, IRAs typically have more investment options than 401(k)s, so an individual can decide for themselves how and where to invest their money.

Learning how to open an IRA is relatively simple — these accounts are available through a variety of financial services providers, including online banks and brokerages. This flexibility allows individuals to comparison shop, evaluating providers based on criteria such as account fees and other factors.

Once an individual opens an account, they may make contributions up to an annual limit at any time prior to the tax filing deadline. For tax year 2026, the limit is $7,500 ($8,500 for individuals 50 and older).

Roth IRA

There are a few key differences when it comes to a traditional IRA vs. a Roth IRA. To begin with, not everyone qualifies to contribute to a Roth IRA. The upper earnings limit to contribute even a reduced amount for tax year 2026 is $168,000 for singles, and $252,000 for married joint filers.

Another thing that distinguishes Roth IRAs from traditional IRAs is that they’re funded with after-tax dollars — meaning that while contributions are not tax deductible, qualified distributions (typically after retirement) are tax-free. Additionally, while a traditional IRA has required minimum distributions (RMD) rules stipulating that account holders must start taking distributions upon turning age 73, there are no RMDs for Roth IRAs.

Roth IRAs have the same annual contribution limits of traditional IRAs. Roth IRAs also offer similar flexibility to traditional IRAs in that individuals can open online IRA accounts with a provider that best suits their needs.

Self-Directed IRA (SDIRA)

Another 401(k) alternative is a self-directed IRA (SIDRA). SDIRAs are available as traditional IRAs as well as Roth IRAs

However, while IRA accounts typically allow for investment in stocks, bonds, mutual funds, and CDs, SDIRAs allow for a much broader set of holdings, including things like real estate investment trusts (REITs), precious metals, and private equity.

While having the freedom to make alternative investments may be appealing to some individuals, the Security and Exchange Commission cautions that those considering a self-directed IRA should do their due diligence before investing, taking steps to confirm both the investments and the person or firm selling them are registered. They also advise investors to be cautious of unsolicited offers and any promises of guaranteed returns. Finally, an individual should make sure that the investments match their risk tolerance.

Simplified Employee Pension (SEP) IRA

A SEP (Simplified Employee Pension) IRA follows the same rules as traditional IRAs with one key difference: They are geared toward small business owners and the self-employed, allowing them to make contributions on workers’ (or the self-employed individual’s) behalf of 25% of the person’s salary, up to $72,000 in 2026.

Though the proceeds of SEP IRAs are 100% vested with the employee, only the employer contributes to this type of retirement account. To be eligible, the employee must have worked for the company for three out of the last five years.

Because people who are self-employed or own their own companies are eligible to set up SEP IRAs — and can contribute up to a quarter of their salary to it — this type of account can be an attractive option for those individuals who would like to put away more each year than traditional or Roth IRAs allow.

Solo 401(k)

Self-employed individuals and business owners may want to consider a solo 401(k). This type of 401(k) is designed for those who have no employees other than their spouse, and the way it works is similar to a traditional 401(k). Contributions are made using pre-tax dollars and taxed when withdrawn in retirement. (There are also Roth solo 401(k)s using after-tax dollars.) The biggest difference between a regular 401(k) and a solo 401(k) is that there is no matching contribution from an employer with a solo 401(k).

In 2026, total contribution limits for a solo 401(k) are $72,000 if you’re under age 50. You can contribute an additional $8,000 in catch-up contributions if you’re age 50 or older. Those between ages 60 and 63 can contribute an additional $11,250 (instead of $8,000) in catch-up contributions.

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their solo 401(k) catch-up contributions into a Roth account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement. (If their plan doesn’t offer a Roth option, individuals who earned more than $150,000 in FICA wages cannot make catch-up contributions.)

One thing to consider: There are extra IRS rules and reporting requirements for a solo 401(k), which may make these plans more complicated than a SEP IRA.

💡 Quick Tip: How do you decide if a certain online trading platform or app is right for you? Ideally, the online investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How a 401(k) Differs From Alternatives

As mentioned, a 401(k) is an employer-sponsored retirement plan. 401(k) contributions are determined by an employee and then drawn directly from their paycheck and automatically deposited into their 401(k) account.

Income tax on 401(k) contributions is deferred until the time the money is withdrawn — usually after retirement — at which point it is taxed as income.

During the time that an employee contributes pre-tax dollars to their 401(k) plan, the contributions are deducted from their taxable income for the year, potentially lowering the amount of income tax they might own. For example, if a person earned a $60,000 annual salary and contributed $6,000 to their 401(k) in a calendar year, they would only pay income tax on $54,000 in earnings.

There are annual limits on 401(k) contributions, and the ceilings on contributions change annually. Here’s a look at the 401(k) contribution limits for 2025 and 2026.

If a person participates in multiple 401(k) plans from several employers, they still need to abide by this limit, so it’s a good idea to add up all contributions across plans.

Again, because of the new law regarding catch-up contributions that went into effect on January 1, 2026, individuals aged 50 and older whose FICA income exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth account.

A 401(k) can be a helpful savings tool for a variety of reasons. Because withdrawals are set up in advance, and automatically deducted from an individual’s paycheck, it essentially puts retirement savings on auto-pilot. In addition, employers often contribute to these plans, whether through matching contributions or non-elective contributions.

But there are penalties for early withdrawals from a 401(k). There are also fees, which may include plan administration and service fees, as well as investment fees such as sales and management charges.

The Takeaway

With a number of 401(k) alternatives to choose from, including different types of IRAs and a solo 401(k), there’s more than one way to save for retirement. There are a variety of factors for an investor to consider, including current income, investment interests, and whether it makes sense to invest pre- or after-tax dollars.

Ultimately, the important thing is to identify a retirement savings account for one’s specific needs, and then contribute to it regularly.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

What is a better option than a 401(k)?

There isn’t necessarily a better option than a 401(k), but if you’re looking for another type of retirement savings plan, you may want to consider a traditional IRA or Roth IRA. These retirement savings accounts allow you to invest your contributions in different types of investments, and you will generally have a wider array of offerings than you might get with a 401(k). Plus, you can have an IRA in addition to a 401(k), which could help you save even more for retirement.

How can I save for retirement if my employer doesn’t offer 401(k)?

If your employer does not offer a 401(k), you can still save for retirement using several other tax-advantaged accounts such as IRAs and health savings accounts (HSAs), or a taxable brokerage account. Self-employed individuals have other options, including SEP IRAs and Solo 401(k)s.

What 401(k) alternatives are there for the self-employed?

For self-employed individuals, there are several tax-advantaged retirement plan alternatives to a traditional 401(k), including Solo 401(k)s, SEP IRAs, SIMPLE IRAs, and traditional or Roth IRAs. The best choice depends on factors like income, number of employees (if any), and desired contribution limits.