Futures vs Stocks: A Comprehensive Guide for Short-Term Traders

The following article on Futures vs Stocks is the opinion of Optimus Futures.

• Futures offer high leverage*y, and 24/5 trading but come with higher risks and complexity.
• Stocks provide ownership, dividends, and long-term growth but have lower leverage* and limited trading hours.
• Day traders need to balance the pros and cons of futures and stocks based on their risk tolerance and strategies.

Short-term trading demands precision, knowledge, and the ability to adapt to rapidly changing market conditions. Two popular instruments in the trading world are futures and stocks. While both offer unique opportunities, they come with distinct characteristics, advantages, and disadvantages. This article aims to provide a comprehensive comparison of futures vs stocks, tailored for short-term traders.

Understanding Futures vs Stocks Basics

Futures 101

• Definition: Futures contracts are agreements to buy or sell an asset at a predetermined price at a specified time in the future. These contracts can be based on various underlying assets, including commodities, indices, currencies, and interest rates.

• Market: Futures are traded on exchanges like the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE) among others across the globe.

• Leverage*: Futures trading typically involves high leverage* depending on the size of the contract (e.g. standard, e-mini, or micro), allowing you to control large positions with a relatively small amount of capital.

Stocks 101

• Definition: Stocks represent fractional ownership in a company. When you buy a stock, you own a share of the company’s assets and earnings.

• Market: Stocks are traded on stock exchanges such as the New York Stock Exchange (NYSE) and NASDAQ.

• Leverage*: Stock trading can involve leverage* through margin accounts, but the leverage* is much lower compared to futures.

What Are the Advantages of Futures?

1. High Leverage*: Futures contracts require a margin deposit. This deposit represents a mere fraction of the contract’s full value. It also allows you to control big positions with little money, boosting potential gains but also amplifying your losses.

ALSO READ | Maximizing Capital Efficiency With Futures Trading Leverage*

2. Liquidity: Many futures markets, especially those based on major indices and heavily traded commodities, offer high liquidity, allowing you to buy and sell contracts with greater ease.

3. 24/5 Trading: Some futures markets are open virtually 24 hours round the clock during the business week; 24/5, but since it’s around the globe, it’s almost 24/7. This allows you to flexibly respond to global events and trade during the “overnight” hours.

4. Standardization and Transparency: Futures contracts are standardized, meaning each contract has the same specifications across the board. This makes futures transparent to all traders and participants.

5. Hedging Opportunities: You can use futures to hedge positions in other markets, like commodities, currencies, and equities—namely, stock index ETFs and mutual funds.

6. Ease of Short Selling: Short selling futures is straightforward as it involves selling a contract without the need to borrow the underlying asset. This makes the process easier compared to stocks and avoids the US Securities Exchange Commission (SEC) “uptick rule,” which requires you to place a short sell at a price above the most recent trade.

7. Less Complicated During Tax Season: Futures trading offers tax advantages over stocks. Profits from stocks held less than a year are fully taxed as short-term gains, while futures profits are taxed 60% as long-term and 40% as short-term gains. Still, consult your tax advisor for details.

What Are the Disadvantages of Futures?

1. High Risk (from High Leverage*): The same leverage* that could potentially amplify your gains can also magnify your losses. Because of this leverage*, futures trading can be highly volatile, especially for inexperienced traders.

2. Complexity: Futures trading has its unique complexities. You need to learn about expiration dates, contract specifications, contract sizes (standard, mini, and micro), different margin requirements, etc. This can be intimidating for beginners or new traders.

3. Expiration Dates: Futures contracts have expiration dates. Positions must be rolled over or closed before the expiration, otherwise, a whole mess of complex issues can arise if you don’t.

4. Potential to Lose More Than the Value of Your Account: Also called “going debit,” you can lose more than you have in your entire trading account if you’re either careless in the size of your trade, or just plain unlucky with a huge and unexpected market movement. If you’re lucky, you’ll get a margin call or go into forced liquidation. If you’re unlucky, you’ll end up owing more than you have in your account.

How Traders Can Use a Stock Portfolio to Compliment Their Trading Activities

1. Use Stocks to Gain Ownership and Dividends: Buying shares of stock gives you ownership in a company. If a stock offers dividends, this gives you the benefit of receiving income in addition to potential growth in the value of a stock.

2. Long-Term Growth Potential: If you’re looking to hold on to an investment indefinitely for long-term capital appreciation and compounding returns, stocks are suited for such a goal.

READ | 10 Things to Get Right Before You Start Trading Futures | Read This if You Trade Stocks.

Why Traders Use Futures Rather Than Stocks

1. Stocks Have Limited Market Hours: You can’t trade around the clock, as stock hours are limited to a few hours each business day. You can trade during ”after-hours” sessions, but the higher spreads are higher, and lower liquidity can be unfavorable.

2. Stocks Have Greater Capital Requirements: Given the lower leverage* characteristics of most stock accounts, you need a much larger amount of capital to trade large positions compared to futures.

3. Stocks Have Short Selling Restrictions Short selling involves borrowing the shares before selling. The princess isn’t always easy with stocks. The uptick rule requires you to sell at a price above the most recent trade. Unlike in futures, you can’t sell short on the way down.

4. Pattern Day Trading Rules Apply to Stocks, Not Futures: If you’re a day trader, you need a minimum account balance of $25,000. Otherwise, you’re subject to the pattern day trading rule (executing four or more day trades within five business days in a margin account) which can lead to various penalties upon repeat violation.

5: Wash Sales Apply to Stocks, Not Futures: Day traders often trade the same stock up and down, sometimes several times in one session. The IRS wash sale rule complicates things. It stops you from claiming a tax deduction on a loss if you buy the same or similar security within 30 days before or after the sale. This rule can make your tax planning very tricky and burdensome.

READ | Futures Hedging Strategies to Protect Your Stocks during Market Downturns

What Does It Cost to Get Started in Futures vs Stocks?

Futures trading has a lower initial capital requirement compared to stock trading. Stocks need a $25,000 minimum balance for day trading, which is high for new traders. FutureFs have no such requirement. With Optimus Futures, you can open an account with as little as five hundred dollars and trade Micro futures contracts.

Futures vs Stocks Cheat Sheet

Feature	Futures	Stocks
What are you buying?	A contract to buy or sell an asset in the future	A small piece of a company (ownership)
How long can you hold it?	Until the contract expires (settlement date)	As long as you want (if the company stays in business)
What can you trade?	Commodities, currencies, and stock indices.	Shares of publicly traded companies
Leverage*	High – You only need to put down a small deposit (margin)	Lower – Margin is more like a loan to buy more shares
Risks	Potentially high – You can lose more than you invest	Limited to the amount you invest in the stock (unless you’re buying on margin)
Profits	From changes in the price of the contract	From increases in stock price and/or dividends
Expiration	Yes – Contracts have a set expiration date	No – You can hold stocks indefinitely
Voting rights	No – You don’t own the underlying asset	Yes – As a shareholder, you have some voting rights
Regulation	Commodity Futures Trading Commission (CFTC/NFA)	Securities and Exchange Commission (SEC)
Good for	Hedging risks, speculating on short-term price movements	Investing in a company for the long term

The Bottom Line

Futures offer high leverage*, liquidity, 24/5 trading, easy short selling, and more, but come with risks and complexity. Stocks provide ownership, dividends, long-term growth, and fewer tax issues but have lower leverage* and market hour limits.

If you’re a swing or day trader, you should weigh these pros and cons based on your risk tolerance, market knowledge, and trading styles. Understanding these nuances can help you choose the type of market that’s better suited for your financial goals and means.

GET STARTED WITH FUTURES

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The initial margin required is small compared to the futures contract’s value, making transactions ‘leveraged’ or ‘geared.’ A modest market movement will have a larger proportional impact on the funds you’ve deposited or will need to deposit; this can work for and against you. High leverage may result in deficits.