Are futures more liquid?
Futures are standardized and traded on regulated exchanges, making them highly transparent and liquid. Futures trading involves leverage and margin requirements, which can amplify both profits and losses.
Unlike stocks and ETFs with limited trading hours and often limited trading volume, the primary futures markets are often highly liquid and tradable nearly 24 hours.
Futures | Forwards | |
---|---|---|
Regulation | Regulated markets | Limited regulation |
Counterparty risk** | Mitigated by an exchange's clearinghouse | Higher, default risk from both parties |
Liquidity | Generally higher | Depends on contract specifics |
While futures trading offers the allure of standardized contracts and the ability to hedge against price fluctuations, forex trading boasts of unparalleled liquidity and the thrill of 24/7 trading.
Highlights: Most Liquid Futures
As of 2021, Natural gas futures traded about 400,000 contracts per day. The daily trading volume of gold futures contracts typically exceeds 200,000 contracts. Soybean futures are among the most liquid agricultural futures contracts, with a daily volume of over 100,000 contracts in 2021.
For liquidity, future contracts are more liquid than ETFs; for example, the E-mini S&P 500 trades daily on average more than the total existing ETFs globally.
Futures are standardized and traded on regulated exchanges, making them highly transparent and liquid. Futures trading involves leverage and margin requirements, which can amplify both profits and losses.
What is the Difference Between Options and Futures Based on Liquidity? Futures contracts are the purest commodity derivative. They are as near to trading the actual commodity as you can go without actually trading one. These contracts have a higher degree of liquidity than options contracts.
Future Markets Are Very Liquid
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.
A future's expiration date is standardized. Forwards mature upon the delivery of the underlying asset (e.g., such commodities as corn or oil). Even though futures are standardized and have preset maturity dates, they entail that the delivery of the underlying asset may never happen.
Why trade futures instead of forex?
Diversification. While spot FX traders are often limited to trading one currency against another or a few limited CFD products, futures trading offers a more diverse range of products to diversify and capture unique market opportunities.
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.
Market Size and Liquidity: The Forex market boasts unmatched liquidity due to its massive size and round-the-clock trading availability. In contrast, futures markets are relatively smaller and more centralized, which can impact liquidity, especially in less actively traded contracts.
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.
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
- 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.
ETFs have annual management fees. Futures margin is capital-efficient with performance bond margins usually less than 5% of notional amount. Reg T margins with stocks and ETFs are 50% of the value of the stock or ETF. This is far larger than futures.
As a futures trader, you can express your opinion long or short multiple times a day or week and you do not have to worry about day trading restrictions applicable to equities or the ability to take a short position in the market. So why miss out on another opportunity because of restrictions? Make a move into futures.
Your personal risk tolerance is a huge factor in this, technically futures are inherently riskier, they have higher leverage than options and they don't have a capped max loss. Unlike buying options, the max you can risk is the full premium amount.
If you trade in the futures market, you have access to more leverage than you do in the stock market. Most brokers will only give you a 50% margin requirement for stocks. For a futures contract, you may be able to get 20-1 leverage, which will magnify your gains but will also magnify your losses.
Why do traders look at futures?
Narrator: One use of a futures contract is to allow a business or individual to navigate risk and uncertainty. Prices are always changing, but with a futures contract, people can lock in a fixed price to buy or sell at a future date. Locking in a price lessens the risk of being negatively impacted by price change.
The futures and options (F&O) contract of any stock can be put under a ban to prevent heightened speculation activity. Typically, a ban, which is a restriction, is put in place when the total open interest, or OI, of a stock, crosses 95 per cent of the market-wide position limit (MWPL).
The transaction costs associated with buying and selling futures contracts are typically lower. This affordability appeals to active traders as it allows for more frequent trading without incurring substantial expenses. Options trading can be costlier due to the premium paid to acquire the right to exercise the option.
While both have the same degree of leverage and capital committed, volatility makes futures the riskier of the two. You must understand that leverage can be akin to a “double-edged sword”. You can gain money quickly, and lose it in the blink of an eye.
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.
References
- https://www.experian.com/blogs/ask-experian/how-much-cash-should-you-keep-at-home/
- https://cfifinancial.com/en/learn-to-trade/etfs-vs-futures
- https://investwithcarl.com/learning-center/investment-basics/investment-types/liquid-investments
- https://corporatefinanceinstitute.com/resources/derivatives/futures-forwards/
- https://www.bankrate.com/investing/low-risk-investments/
- https://money.usnews.com/investing/articles/best-investments-during-a-recession
- https://www.investopedia.com/ask/answers/031015/how-risky-are-futures.asp
- https://www.investopedia.com/articles/active-trading/032515/advantages-trading-futures-over-stocks.asp
- https://www.litefinance.org/blog/for-beginners/futures-vs-forwards/
- https://lifeinsurance.adityabirlacapital.com/articles/your-money/safe-investment-plans-with-high-returns-in-india
- https://www.angelone.in/knowledge-center/futures-and-options/difference-between-options-and-futures
- https://www.investopedia.com/ask/answers/13/safe-liquid-investment-for-emergencies.asp
- https://core.ac.uk/download/pdf/1551915.pdf
- https://www.bajajfinserv.in/futures-contract
- https://www.bajajfinserv.in/futures-and-options
- https://www.investopedia.com/articles/active-trading/020216/five-advantages-futures-over-options.asp
- https://www.nasdaq.com/articles/4-ways-to-grow-%24100000-into-%241-million-for-retirement-savings-13
- https://www.tdameritrade.com/forms/TDA601.pdf
- https://www.wallstreetprep.com/knowledge/futures-contract/
- https://www.schwab.com/learn/story/trying-out-futures-options-here-are-key-differences-vs-equities
- https://ninjatrader.com/futures/why-trade-futures/futures-vs-stocks/
- https://jpmcc-gcard.com/wp-content/uploads/2018/10/01-14-15_till_-_why_futures_contracts_succeed_or_fail.pdf
- https://ca.practicallaw.thomsonreuters.com/4-603-8085?transitionType=Default&contextData=(sc.Default)
- https://www.futurelearn.com/info/courses/risk-management/0/steps/39294
- https://www.linkedin.com/pulse/forex-futures-same-liliana-ruby
- https://homework.study.com/explanation/which-of-the-following-statements-is-correct-a-futures-contracts-have-less-default-risk-because-the-exchange-acts-as-the-counterparty-for-all-transactions-b-forward-contracts-trade-on-an-organized-exchange-and-are-marked-to-market-daily-c-goods-a.html
- https://365financialanalyst.com/knowledge-hub/trading-and-investing/what-are-forward-contracts-futures-contracts-and-swaps/
- https://www.indiainfoline.com/knowledge-center/derivatives/difference-between-forward-and-future-contract
- https://www.joinleland.com/library/a/private-equity-vs-hedge-fund-pros-cons-and-how-to-decide
- https://www.cnb.com/personal-banking/insights/what-is-a-cd.html
- https://canvasannuity.com/blog/safest-place-for-retirement-savings
- https://groww.in/p/difference-between-options-and-futures
- https://www.cmegroup.com/education/courses/understanding-the-benefits-of-futures/the-benefits-of-liquidity.html
- https://www.samco.in/difference-between-options-and-futures
- https://prepnuggets.com/cfa-level-1-study-notes/derivatives-study-notes/pricing-and-valuation-of-futures-contracts/
- https://en.wikipedia.org/wiki/Interest_rate_future
- https://financetrain.com/credit-risk-and-forward-contracts
- https://www.unionbankofindia.co.in/pdf/belg_28_techriskmgmtpolicyforwardcontracts.pdf
- https://www.schwab.com/futures/what-are-futures
- https://homework.study.com/explanation/assume-you-have-100-000-what-would-you-do-to-double-it-in-1-year-briefly-explain.html
- https://www.empower.com/the-currency/money/what-are-liquid-assets
- https://www.investopedia.com/ask/answers/021615/what-safest-investment.asp
- https://tradeproacademy.com/options-vs-futures-which-is-more-riskier/
- https://www.5paisa.com/stock-market-guide/derivatives-trading/about-futures-contract
- https://www.investopedia.com/ask/answers/difference-between-options-and-futures/
- https://analystnotes.com/cfa-study-notes-evaluate-credit-risk-in-a-forward-contract-and-explain-how-market-value-is-a-measure-of-exposure-to-a-party-in-a-forward-contract.html
- https://www.cmegroup.com/education/courses/futures-vs-etfs/why-trade-futures-instead-of-etfs.html
- https://www.motilaloswal.com/blog-details/know-the-difference-between-forward-and-futures-contract/1079
- https://www.zeebiz.com/market-news/news-stock-market-futures-and-options-securities-ban-nse-bse-impact-on-prices-cash-segment-267978
- https://www.fisdom.com/which-is-better-futures-or-options/
- https://en.wikipedia.org/wiki/Futures_contract
- https://www.investopedia.com/articles/optioninvestor/07/money_management_futures.asp
- https://smartasset.com/investing/liquid-assets
- https://danskebank.no/-/media/pdf/danske-bank/no/finansielle-instrumenter/bond-futures-bond-forwards-and-bond-options-en.pdf?rev=a457f31ee2544aeb86934590f55684bf&hash=346914C50FFBA418AADABB2E237AA9EB
- https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA101285.pdf
- https://www.cmegroup.com/education/courses/understanding-the-benefits-of-futures/the-benefits-of-day-trading-futures.html
- https://www.investopedia.com/ask/answers/06/forwardsandfutures.asp
- https://www.fdic.gov/analysis/cfr/bank-research-conference/annual-6th/stulzr.pdf
- https://seekingalpha.com/article/4437420-what-are-liquid-assets
- https://gitnux.org/most-liquid-futures/
- https://www.investopedia.com/best-futures-trading-platforms-7370002
- https://www.ig.com/uk/futures-trading/futures-vs-forwards
- https://www.linkedin.com/pulse/trading-currency-spot-vs-futures-which-more-lucrative-cmsprime
- https://www.investopedia.com/ask/answers/072915/how-does-forward-contract-differ-call-option.asp
- https://www.e-futures.com/blog/comprehensive-comparison-for-investors/
- https://meetseanoneill.com/which-investments-have-the-least-liquidity/
- https://www.indiainfoline.com/knowledge-center/derivatives/what-are-the-advantages-of-futures
- https://stockanalysis.com/article/safe-low-risk-investments/
- https://www.investopedia.com/ask/answers/06/futureshedge.asp
- https://quizlet.com/79150807/wse-financial-practice-test-2-flash-cards/
- https://www.brex.com/journal/what-are-liquid-assets
- https://study.com/academy/practice/quiz-worksheet-forward-contract-value.html
- https://www.investopedia.com/articles/active-trading/090215/analyzing-5-most-liquid-commodity-futures.asp
- https://www.fool.com/investing/how-to-invest/how-to-invest-50k/
- https://quizlet.com/71549839/finance-forward-and-future-contracts-flash-cards/
- https://fastercapital.com/topics/disadvantages-of-using-forward-contracts.html
- https://smartasset.com/investing/futures-vs-stocks
- https://aliceblueonline.com/futures-contract-vs-forward-contract/
- https://quizlet.com/18908657/options-and-futures-markets-exam-1-flash-cards/
- https://groww.in/blog/how-do-forward-contracts-work
- https://www.investopedia.com/terms/l/liquidasset.asp
- https://analystprep.com/cfa-level-1-exam/derivatives/why-forward-futures-prices-differ/
- https://www.nasdaq.com/articles/10-most-actively-traded-etfs-of-q4
- https://www.smallcase.com/learn/what-is-futures-and-options-investing/
- https://www.bajajfinserv.in/forward-contract
- https://www.religareonline.com/knowledge-centre/derivatives/what-is-forward-contracts/
- https://homework.study.com/explanation/when-comparing-futures-and-forward-contracts-it-has-been-said-that-futures-are-more-liquid-but-forwards-are-more-flexible-explain-what-this-statement-means-and-comment-on-how-differences-in-contract-liquidity-and-design-flexibility-might-influence-an-in.html
- https://hmarkets.com/top-commodities-by-traded-volume/
- https://www.indiainfoline.com/knowledge-center/derivatives/what-are-the-risks-of-futures-contract
- https://www.quora.com/Can-you-trade-futures-without-leverage
- https://ninjatrader.com/futures/why-trade-futures/futures-vs-forex-and-cfds/
- https://www.investopedia.com/articles/active-trading/110614/futures-derivatives-and-liquidity-more-or-less-risky.asp
- https://www.investopedia.com/terms/c/contractfordifferences.asp
- https://www.motilaloswal.com/blog-details/which-is-more-risky-futures-trading-or-options-trading/20719
- https://www.fool.com/investing/how-to-invest/stocks/futures-vs-options/
- https://www.investopedia.com/ask/answers/022315/what-are-tradable-commodities.asp
- https://www.shiksha.com/online-courses/articles/difference-between-forward-and-future-contract/
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/spot-price/
- https://ninjatrader.com/futures/why-trade-futures/futures-vs-stocks-options/
- https://www.investopedia.com/terms/f/futurescontract.asp
- https://www.linkedin.com/pulse/futures-trading-strategies-quantifiedstrategies-yt6of
- https://rjofutures.rjobrien.com/learning-center/general-trading/deciphering-the-market-futures-trading-vs-forex-trading
- https://www.cmegroup.com/education/courses/introduction-to-futures/futures-contracts-compared-to-forwards.html
- https://www.imf.org/external/pubs/ft/fandd/2012/06/basics.htm
- https://flippa.com/blog/radical-fire-how-to-turn-10k-into-100k-12-top-ways-to-do-it/
- https://faculty.weatherhead.case.edu/ritchken/textbook/Powerpoint/Notes2.PDF
- https://www.investopedia.com/articles/active-trading/043015/how-why-interest-rates-affect-futures.asp