• Category: Beginner

What Is The Difference Between Stocks And Futures

Stocks and futures are popular trading vehicles. Although they share some similar characteristics, they are more different than they are similar. It is vital that you recognize these differences so that you can better make informed trading decisions.


What Is The Difference Between Stocks And Futures?

Here are their main differences:

Varying obligations

The primary difference between futures and stocks is the obligations they accord the trader. Stocks are owned while futures are contracts.  Futures allow you to enter into a contract with other traders with an obligation to either buy or sell an asset at a specific date in the future as long as the position of the asset holder has not expired. In other words, you do not purchase the commodity; you only enter into a contract. On the other hand, owning a stock means that you have bought a piece of a particular company, making you a shareholder of that company. For example, if you predict that the price of a gallon of crude was going to spike, you could enter into a contract that would allow you to purchase crude oil at the prevailing price and hopefully sell it at a higher price for a profit. Futures allow you to trade with the movements of the market because you are not purchasing or selling the actual commodities. On the contrary, you can only sell a stock that you own.
The beauty of the Futures markets is that because you are trading contracts, and not the actual commodity, you can make money if the market is moving up or down.

The availability of buyers and sellers

When it comes to futures trading, there is always someone willing to enter into a contract to purchase a product and there is a willing seller, almost simultaneously. So when there is a trader who predicts a rise in the price of gold, there is always a trader who will predict declining gold prices, a good time to sell. This means that Futures are always a zero sum trade. For every trader making money, there is a trader losing money. On the contrary, stocks do not always have a willing buyer and a willing seller almost at the same time. Sometimes, an investor may want to buy more stock from a particular company but they may be unable to do this unless another shareholder is willing to sell their own stocks. It is often very difficult to find a shareholder willing to sell their stocks. At the same time, there is the anticipation that buying a stock in particular will give you higher returns in future.

Expiration period

Unlike stocks, futures have an expiration period within which a contract is expected to be delivered. Although you will not actually deliver the product, it is important to bear in mind the delivery date as this is when the contract will expire. Typically, there are fewer buyers and sellers toward the end of the contract’s expiry date. On the other hand, stockowners can continue to be shareholders of a company for the duration that the company is in existence. Stock investors often decide to sell their shares when they think it will be profitable to do so. In contrast, you can only maintain your future position as a buyer or seller if you have adequate money to do this. In fact, “Buy and hold” strategy would not work very well in the Futures markets unless you had VERY big bankroll.

Which one of these trading tools is better? The truth is, none is better; they are just two different trading vehicles. Understanding the difference will allow you to choose which one of them seems more lucrative or fits with your trading goals.

 

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