Futures vs. Stocks

Deciding whether to invest in futures or stocks requires knowledge about both products and extensive research. Both investment instruments offer the potential for reasonable rewards, but they are fundamentally different. This article provides a detailed comparison of futures vs stocks to highlight their similarities and differences.

What Are Stocks?

Stocks are units of ownership in a company. Buying a company's stock makes you a co-owner with a stake in its assets and profits. As a stockholder, you can enjoy capital appreciation and dividends and benefit from the company's growth and profitability, although you are vulnerable to downside risks.

Stocks trade on stock exchanges like the New York Stock Exchange (NYSE) and the Nasdaq exchange. These exchanges, together with over-the-counter markets and electronic trading platforms, facilitate trading in the stock market. Here, buyers and sellers meet to exchange shares at an agreed-upon price determined by market supply and demand, the company's performance, financial health, industry trends and other factors.

Pros

• Stocks offer the potential for long-term capital appreciation and may also generate regular income from dividends.
• Stocks are easy to buy and sell through brokerage accounts and often have liquidity and transparency.
• Investing in stocks enables you to spread your investments across various sectors, industries and geographic locations, reducing risk and increasing the potential returns for your portfolio.
• Buying a company's stock typically gives you voting rights and the ability to influence some corporate decisions.

Cons

• Stocks are subject to fluctuations, resulting in significant short-term losses from market volatility.
• Stocks are exposed to company-specific risks, such as poor management, scandals, lawsuits or bankruptcy.
• External factors like economic conditions, political events or natural disasters can affect stocks.
• Investing in stocks may involve higher capital requirements and fees than other financial instruments.

What are Futures?

Futures are contracts to exchange an asset at a future predetermined price and date. The asset can be a commodity, such as gold, oil or wheat, or a financial instrument, such as a currency, index or bond. Futures are standardized and traded on futures exchanges, like the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE), where traders can buy and sell contracts using margin accounts that borrow funding. The contract price is determined by market expectations of the underlying asset's future value, along with interest rates and supply and demand factors.

Pros

• Futures offer the opportunity for high profits in a short period, as well as leverage and flexibility.
• You can hedge your risk exposure or speculate on price movements of assets using futures contracts.
• Futures have low transaction costs and commissions compared to other instruments.
• Futures have high liquidity, transparency and standardized contract specifications.

Cons

• Futures involve high risk and volatility, margin calls and potential losses that can exceed your initial investment.
• Specialized knowledge and skills are required to trade futures effectively and profitably.
• Supply and demand imbalances, market sentiment or unexpected events can subject futures to price fluctuations.
• Compared to other instruments, futures have limited trading hours and availability.

Comparing Futures Trading with Stock Trading

Explore how two well-regarded trading strategies compare on key factors that impact your trading experience and outcomes.

Market Accessibility and Liquidity

Stocks can be bought and sold on various global exchanges during trading hours, offering a vast selection across different sectors, industries and regions. Stock trading is highly liquid, allowing for seamless entry and exit from positions without significantly affecting market prices. 

Futures trading is a more specialized form of trading that requires a futures brokerage account, permission to trade on dedicated futures exchanges and compliance with specific rules and regulations. The availability of contracts for each asset class may vary depending on seasonality, expiration date or demand. The futures market has lower liquidity than the stock market, which may pose challenges in finding buyers or sellers for contracts at desired prices.

Risk and Volatility

Investing in stocks carries risks depending on your investment strategy, time horizon and risk tolerance. Market fluctuations and company-specific issues can lead to losses, but diversifying your portfolio or using stop-loss orders can help mitigate these risks. Holding stocks for longer periods can also lead to recovery or price increases. 

Futures trading is highly risky because of leverage and margin. Losses can exceed your initial investment, and margin calls may require additional deposits to meet margin requirements or position closures. Futures contracts also have limited trading time and are subject to sudden price changes because of market imbalances, sentiment or unexpected events.

Investment Time Horizon and Goals

Stock investing involves a longer-term approach, striving for capital appreciation and dividend income. You can hold stocks for extended periods depending on your objectives and expectations while benefiting from the compounding effect of reinvesting capital gains and dividends. 

Stock investing also allows you to align your values and interests with the companies you invest in and have a say in their decisions. 

Futures trading focuses on short-term speculation, enabling traders to gain from price fluctuations within a specific timeframe. You can buy and sell futures contracts within minutes, hours or days, depending on market conditions and your preferred trading strategy. Futures trading allows hedging risk exposure or speculation on commodities, currencies or indices. Futures traders can also use leverage and margin, which amplifies returns — or losses in the event the trade goes against them.

Trading Strategies and Flexibility

Stocks and futures offer various trading strategies and flexibility. Stock investing involves buy-and-hold, value investing, growth investing, dividend investing or index investing. You can use fundamental analysis, technical analysis or a combination of both to identify opportunities and evaluate stock performance. Stock investing is flexible. You can customize your position size, entry and exit points and risk-reward ratio.

Futures trading offers day trading, swing trading, trend trading, scalping or spread trading. You can also use technical or fundamental analysis or both to analyze asset price movements and trends. Futures trading offers the flexibility to go long or short on an asset class and use leverage and margin to increase exposure or reduce risk.

Taxation and Regulatory Considerations

When deciding between stocks or futures, it's important to consider their taxation and regulatory factors. Stock investing is subject to capital gains and dividends taxes based on income level, holding period and tax jurisdiction. You may have to pay fees and commissions to your broker for executing trades. Stock investing is regulated by authorities like the U.S. Securities and Exchange Commission (SEC) in the U.S. or the Financial Conduct Authority (FCA) in the U.K., which strive to safeguard investors' rights.

Futures trading has different taxation rules than stock investing. Typically, futures contracts are subject to a 60/40 split between long and short-term capital gains rates, ensuring 60% of gains or losses fall under the lower long-term rate (currently 15% for most taxpayers) and 40% under the higher short-term rate (now 37% for most taxpayers). Along with fees and commissions to your broker, futures trading is governed by bodies such as the Commodity Futures Trading Commission (CFTC) in the U.S. or the Financial Services Authority (FSA) in the U.K., which aim to promote fair and transparent markets.

Best Futures Brokers

If you are considering trading futures contracts, you will need a reliable and reputable broker that can cater to your specific needs. Benzinga recommends the following futures brokers based on their fees, platforms, customer support, educational resources and other features.

Futures vs Stocks: Choosing Your Financial Path

The choice between futures and stocks depends on your preferences, risk tolerance and investment goals. Stocks offer accessibility, diverse opportunities and long-term growth potential, while futures provide quick profit potential with leverage and potential risks. Consider your time horizon, trading strategy and tax implications to decide. Both choices have merits and drawbacks, so assess which one aligns best with your financial objectives and risk appetite.

Frequently Asked Questions