Advantages of Trading Futures vs. Stocks (2024)

Futures are derivative contracts that derive value from a financial asset, such as a traditional stock, bond, or stock index, and thus can be used to gain exposure to various financial instruments, including stocks, indexes, currencies, and commodities.

Futures are a common vehicle for hedging and managing risk;If someone is already exposed to or earns profits through speculation, it is primarily due to their desire to hedge risks.

Future contracts, because of the way they are structured and traded, have many inherent advantages over trading stocks.

Key Takeaways

  • Stock investors may have heard the term "futures" or "futures market," but thought to themselves that these esoteric derivatives are not for them.
  • While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks.
  • These advantages include greater leverage, lower trading costs, and longer trading hours.

8 Advantages of Trading Futures

1. Futures Are Highly Leveraged Investments

To trade futures, an investor has to put in a margin—a fraction of the total amount (typically 10% of the contract value). The margin is essentially collateral that the investor has to keep with their broker or exchange in case the market moves opposite to the position they have taken and they incur losses. This may be more than the margin amount, in which case the investor has to pay more to bring the margin to a maintenance level.

What trading futures essentially means for the investor is that they can expose themself to a much greater value of stocks than they could when buying the original stocks. And thus their profits also multiply if the market moves in his direction (10 times if the margin requirement is 10%).

For example, if the investor wants to invest $10,000 into the S&P 500 index they can either buy 25 shares of the SPDR S&P 500 ETF (SPY) priced at around $400 per share, or 1 E-mini futures contract with a margin requirement of $10,000. If SPY increased to $401, the investor would have made $25. Over that same period, the E-mini contract would have increased from $4000 to $4010 resulting in a $500 gain (1 index point = $50.00).

2. Future Markets Are Very Liquid

Future contracts are traded in huge numbers every day and hence futures are very liquid. The constant presence of buyers and sellers in future markets ensures market orders can be placed quickly. Also, this entails that the prices do not fluctuate drastically, especially for contracts that are near maturity. Thus, a large position may also be cleared out quite easily without any adverse impact on price.

In addition to being liquid, many futures markets trade beyond traditional market hours. Extended trading in stock index futures often runs around the clock.

3. Commissions and Execution Costs Are Low

Commissions on future trades are very low and are charged when the position is closed. The total brokerage or commission is usually as low as 0.5% of the contract value. However, it depends on the level of service provided by the broker. An online trading commission may be as low as $5 per side, whereas full-service brokers may charge $50 per trade.

Note that online brokers are increasingly offering free stock and ETF trading across the board, making the transaction cost proposition for futures a bit less attractive than it had been in the past.

4. Speculators Can Make Fast Money

An investor with good judgment can make quick money in futures because essentially they are trading with 10 times as much exposure as with normal stocks. Also, prices in the future markets tend to move faster than in the cash or spot markets.

A word of caution, however: Just as wins can come quicker, futures also magnify the risk of losing money. That said, it could be minimized by using stop-loss orders. Because futures are highly leveraged, margin calls might come sooner for traders with wrong-way bets, making them potentially a more risky instrument than a stock when markets move fast.

5. Futures Are Great for Diversification or Hedging

Futures are very important vehicles for hedging or managing different kinds of risk. Companies engaged in foreign trade use futures to manage foreign exchange risk, interest rate risk by locking in an interest rate in anticipation of a drop in rates if they have a sizable investment to make, and price risk to lock in prices of commodities such as oil, crops, and metals that serve as inputs. Futures and derivatives help increase the efficiency of the underlying market because they lower unforeseen costs of purchasing an asset outright. For example, it is much cheaper and more efficient to go long in futures than to replicate the index by purchasing every stock.

6. Future Markets Are More Efficient and Fair

It is difficult to trade on inside information in future markets. For example, who can predict for certain the next Federal Reserve policy action?Unlike single stocks that have insiders or corporate managers who can leak information to friends or family to front-run a merger or bankruptcy, futures markets tend to trade market aggregates that do not lend themselves to insider trading. As a result, futures markets can be more efficient and give average investors a fairer shake.

7. Futures Contracts Are Basically Only Paper Investments

The actual stock/commodity being traded is rarely exchanged or delivered, except on the occasion when someone trades to hedge against a price rise and takes delivery of the commodity/stock on expiration. Futures are usually a paper transaction for investors interested solely on speculative profit.This means futures are less cumbersome than holding shares of individual stocks, which need to be kept track of and stored someplace (even if only as an electronic record). Companies need to know who owns their shares in order to pay out dividends and to record shareholder votes. Futures contracts don't need any of that record keeping.

8. Short Selling Is Easier

One can get short exposure on a stock by selling a futures contract, and it is completely legal and applies to all kinds of futures contracts. On the contrary, one cannot always short sell all stocks, as there are different regulations in different markets, some prohibiting short selling of stocks altogether. Short selling stocks requires a margin account with a broker, and to sell short, you must borrow shares from your broker to sell what you don't already own. If a stock is hard to borrow, it can be expensive or even impossible to short-sell those shares.

The Bottom Line

Futures have great advantages that make them appealing to all kinds of investors—speculative or not. However, highly-leveraged positions and large contract sizes make the investor vulnerable to huge losses, even for small movements in the market. Thus, one should strategize and do due diligence before trading futures and understand both their advantages as well as their risks.

Advantages of Trading Futures vs. Stocks (2024)

FAQs

Advantages of Trading Futures vs. Stocks? ›

When trading futures vs. stocks, there are no rules requiring a minimum account balance or restricting how many trades can be placed in a week. As a futures trader, you can trade long or short multiple times a day or week without worrying about day trading restrictions.

Is it better to trade futures or stocks? ›

While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks. These advantages include greater leverage, lower trading costs, and longer trading hours.

What is the disadvantage of trading futures? ›

Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.

Is trading futures riskier than stocks? ›

That said, generally speaking, futures trading is often considered riskier than stock trading because of the high leverage and volatility involved that can expose traders to significant price moves.

Why would a trader prefer futures options? ›

Diversify Risks Using Options on Futures

While many traders are interested in trading futures, they may also want the flexibility that comes with trading options. An advantage of options on futures is the ability to reduce risk in your portfolio in different ways.

Why do people trade futures instead of stocks? ›

When trading futures vs. stocks, there are no rules requiring a minimum account balance or restricting how many trades can be placed in a week. As a futures trader, you can trade long or short multiple times a day or week without worrying about day trading restrictions.

Do day traders trade stocks or futures? ›

Day traders typically target stocks, options, futures, commodities, or currencies (including crypto). They enter and exit positions within the same day (hence the term day traders). They hold positions for hours, minutes, or even seconds before selling them. They rarely hold positions overnight.

Are futures hard to trade? ›

Remember that futures trading is hard work and requires a substantial investment of time and energy.

What are the pros and cons of trading futures options? ›

Advantages of futures trading include access to leverage and hedging while disadvantages include overleveraging and challenges presented by expiry dates. Choose a futures trading platform that is intuitive, offers multiple order types, and has competitive fees and commissions.

Why are futures banned? ›

If the market open interest of any stock crosses 95% of the MWPL (Market-wide positions limits), all F&O contracts of that stock enter a ban period. Market Wide Position Limit is the total limit available for a stock across all the market participants/traders combined.

Which is more profitable options or futures? ›

The choice between futures and options depends on your investment goals and risk tolerance – Both instruments can be used for hedging, but options offer more flexibility and limited risk. Futures offer higher potential profits but also higher risk, while options provide limited profit potential with capped losses.

What are the best futures to trade? ›

What futures are most profitable? Trading in futures markets such as the Micro E-Mini Russell 2000 (M2K), Micro E-Mini S&P 500 (MES), Micro E-Mini Dow (MYM), and Micro E-Micro FX contracts can be highly profitable due to their distinct market characteristics.

What is the best platform to trade futures? ›

Best Futures Trading Platforms of 2024
  • Best for Professional Futures Traders: Interactive Brokers.
  • Best for Dedicated Futures Traders: NinjaTrader.
  • Best for Futures Education: E*TRADE.
  • Best for Desktop Futures Trading: TradeStation.

Which trading is best for beginners? ›

Overview: Swing trading is an excellent starting point for beginners. It strikes a balance between the fast-paced day trading and long-term investing.

Is it cheaper to trade futures or options? ›

1 you would see that you held an unprofitable position and simply allow the contract to expire without exercising it. However, this makes options contracts significantly more expensive than futures.

Which futures are the easiest to trade? ›

High Liquidity For Low Slippage
  • Eurodollar (GE)
  • E-mini S&P 500 (ES)
  • 10-Year Treasury Note (ZN)
  • 5-Year Treasury Note (ZF)
  • Crude Oil WTI (CL)
  • Natural Gas (NG)
  • U.S. Treasury Bond (ZB)
  • E-mini Nasdaq 100 (NQ)

Which is more profitable futures or options or stocks? ›

Options generally are a higher-risk, higher-reward opportunity than stocks. Investors considering them should know all their benefits and drawbacks.

Is futures trading the most profitable? ›

What futures are most profitable? Trading in futures markets such as the Micro E-Mini Russell 2000 (M2K), Micro E-Mini S&P 500 (MES), Micro E-Mini Dow (MYM), and Micro E-Micro FX contracts can be highly profitable due to their distinct market characteristics.

Is trading futures a good way to make money? ›

In the world of futures trading, success can mean significant profits—but mistakes can be extremely costly. That's why it's so important to have a strategy in place before you start trading.

Is it worth it to trade futures? ›

Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track. Be sure to understand all risks involved before trading futures.

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