Futures and stocks are both types of financial instruments, but they are very different in many respects. Here are some of the key differences:
Ownership
When you buy stocks, you become an owner (shareholder) of a portion of the company, with rights to a proportion of the company's assets and earnings, as well as voting rights in many cases.
Futures are not ownership instruments. They are contracts that obligate the buyer to purchase, and the seller to sell, a specific asset (like a commodity or financial instrument) at a predetermined future date and price. There is no claim to assets or earnings beyond the specifications of the contract.
Contract Terms
Stocks can be held indefinitely, as long as the company remains publicly traded.
Futures have a finite lifespan; they expire on a specific date in the future. Before this date, the contract will need to be sold, otherwise it will be settled by physical delivery or cash settlement.
Leverage
When buying stocks, the transaction is usually financed with cash, meaning you pay the full price of the shares upfront, although buying on margin is also possible.
Futures contracts, however, require only a small fraction of the contract's value (called margin) to be put down when the contract is entered into. This creates leverage, which can amplify both gains and losses.
Trading Hours
Stock trading hours are typically limited to the business hours of the stock exchange, with some possibility for after-hours trading.
Futures contracts, on the other hand, are often tradable nearly 24 hours a day, depending on the contract and the exchange.
Dividends
Stocks often pay dividends to shareholders, assuming the company is profitable and chooses to distribute some of those profits to its shareholders.
Futures contracts do not pay dividends. The profit or loss from a futures position comes from the change in the underlying asset's price.
Marking to Market
The value of a stock position changes as the market price changes, but profits or losses are not realized until the position is closed.
Futures contracts, on the other hand, are "marked to market" daily, which means the change in the market value of the contract is settled at the end of each trading day. This could result in a margin call if the market moves against your position and the money in your account is insufficient to cover the loss.
These differences mean that stocks and futures serve different purposes in an investment portfolio and come with different risk and return profiles. It's important for investors to understand these differences and to consider their own financial goals, risk tolerance, and market approach when deciding to trade stocks, futures, or both.
