Differences between Futures and Stocks Trading

People who are new to futures markets are sometimes unclear about the differences between futures and stocks. Although futures and stocks do have some things in common, they are based on quite different premises. Futures are contracts with expiration dates, while stocks represent ownership in a company. The following chart may help delineate the major differences between them.

Futures Stocks
Trading Traded at an organized exchange Traded at an organized exchange or over-the-counter
Represents A commitment to buy or sell something in the future at an agreed upon price Ownership of a corporation
Issued by A futures exchange, which writes the terms of each contract and makes it available for trading, but does not specifically issue it Buyers and sellers create an obligation when they enter into futures contracts A corporation
Maximum number that can be issued No limit to the number of futures contracts that can be Set by corporate charter. There are, however, position limits and position accountability in stock index futures
Investing Can be traded in expectation of making a profit, but can be a zero sum game Long-term positive expectation of return, but no guarantee of profit
Cash Flows In and out flows to traders’ accounts are based on daily marking to market – a debiting or crediting of each futures account based on that day’s changes in the price of the contract(s) held in each account May receive dividends
Leverage Highly leveraged May be leveraged if purchased on margin, with a 50 percent margin being the standard (considered a loan from broker with interest required)
Ability to Sell Short Yes, as easily as buying long; no uptick in price necessary Permitted under special circumstances. A short sale can only be made on an uptick – when the stock price has gone up a tick
Time Typically short term Fixed maturity/expiration date, usually less than one year Typically, but not always, long term Stocks are perpetual instruments so long as the underlying company remains solvent
Money Buyers and sellers deposit a designated performance bond in an account; the amount is a percentage of the current value of the contract As contract prices change, the accounts are debited or credited accordingly Buyer purchases shares Margin may be paid as a down payment in some cases Broker may ask for a margin call – a request for additional money from the person buying or selling on margin due to additional price changes in the stock
Monitoring Traders must be aware of expiration day and last trading time There is no expiration as such
Risk Depending on price changes, more than the initial investment can be lost If the stock is not bought on margin the most that can be lost is the entire investment