Advantages of Trading Futures vs. Stocks (2024)

Futures are derivative contracts that derive value from a financial asset, such as a traditional stock, bond, or stock index, and thus can be used to gain exposure to various financial instruments, including stocks, indexes, currencies, and commodities.

Futures are a common vehicle for hedging and managing risk;If someone is already exposed to or earns profits through speculation, it is primarily due to their desire to hedge risks.

Future contracts, because of the way they are structured and traded, have many inherent advantages over trading stocks.

Key Takeaways

  • Stock investors may have heard the term "futures" or "futures market," but thought to themselves that these esoteric derivatives are not for them.
  • While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks.
  • These advantages include greater leverage, lower trading costs, and longer trading hours.

8 Advantages of Trading Futures

1. Futures Are Highly Leveraged Investments

To trade futures, an investor has to put in a margin—a fraction of the total amount (typically 10% of the contract value). The margin is essentially collateral that the investor has to keep with their broker or exchange in case the market moves opposite to the position they have taken and they incur losses. This may be more than the margin amount, in which case the investor has to pay more to bring the margin to a maintenance level.

What trading futures essentially means for the investor is that they can expose themself to a much greater value of stocks than they could when buying the original stocks. And thus their profits also multiply if the market moves in his direction (10 times if the margin requirement is 10%).

For example, if the investor wants to invest $10,000 into the S&P 500 index they can either buy 25 shares of the SPDR S&P 500 ETF (SPY) priced at around $400 per share, or 1 E-mini futures contract with a margin requirement of $10,000. If SPY increased to $401, the investor would have made $25. Over that same period, the E-mini contract would have increased from $4000 to $4010 resulting in a $500 gain (1 index point = $50.00).

2. Future Markets Are Very Liquid

Future contracts are traded in huge numbers every day and hence futures are very liquid. The constant presence of buyers and sellers in future markets ensures market orders can be placed quickly. Also, this entails that the prices do not fluctuate drastically, especially for contracts that are near maturity. 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.

3. Commissions and Execution Costs Are Low

Commissions on future trades are very low and are charged when the position is closed. The total brokerage or commission is usually as low as 0.5% of the contract value. However, it depends on the level of service provided by the broker. An online trading commission may be as low as $5 per side, whereas full-service brokers may charge $50 per trade.

Note that online brokers are increasingly offering free stock and ETF trading across the board, making the transaction cost proposition for futures a bit less attractive than it had been in the past.

4. Speculators Can Make Fast Money

An investor with good judgment can make quick money in futures because essentially they are trading with 10 times as much exposure as with normal stocks. Also, prices in the future markets tend to move faster than in the cash or spot markets.

A word of caution, however: Just as wins can come quicker, futures also magnify the risk of losing money. That said, it could be minimized by using stop-loss orders. Because futures are highly leveraged, margin calls might come sooner for traders with wrong-way bets, making them potentially a more risky instrument than a stock when markets move fast.

5. Futures Are Great for Diversification or Hedging

Futures are very important vehicles for hedging or managing different kinds of risk. Companies engaged in foreign trade use futures to manage foreign exchange risk, interest rate risk by locking in an interest rate in anticipation of a drop in rates if they have a sizable investment to make, and price risk to lock in prices of commodities such as oil, crops, and metals that serve as inputs. Futures and derivatives help increase the efficiency of the underlying market because they lower unforeseen costs of purchasing an asset outright. For example, it is much cheaper and more efficient to go long in futures than to replicate the index by purchasing every stock.

6. Future Markets Are More Efficient and Fair

It is difficult to trade on inside information in future markets. For example, who can predict for certain the next Federal Reserve policy action?Unlike single stocks that have insiders or corporate managers who can leak information to friends or family to front-run a merger or bankruptcy, futures markets tend to trade market aggregates that do not lend themselves to insider trading. As a result, futures markets can be more efficient and give average investors a fairer shake.

7. Futures Contracts Are Basically Only Paper Investments

The actual stock/commodity being traded is rarely exchanged or delivered, except on the occasion when someone trades to hedge against a price rise and takes delivery of the commodity/stock on expiration. Futures are usually a paper transaction for investors interested solely on speculative profit.This means futures are less cumbersome than holding shares of individual stocks, which need to be kept track of and stored someplace (even if only as an electronic record). Companies need to know who owns their shares in order to pay out dividends and to record shareholder votes. Futures contracts don't need any of that record keeping.

8. Short Selling Is Easier

One can get short exposure on a stock by selling a futures contract, and it is completely legal and applies to all kinds of futures contracts. On the contrary, one cannot always short sell all stocks, as there are different regulations in different markets, some prohibiting short selling of stocks altogether. Short selling stocks requires a margin account with a broker, and to sell short, you must borrow shares from your broker to sell what you don't already own. If a stock is hard to borrow, it can be expensive or even impossible to short-sell those shares.

The Bottom Line

Futures have great advantages that make them appealing to all kinds of investors—speculative or not. However, highly-leveraged positions and large contract sizes make the investor vulnerable to huge losses, even for small movements in the market. Thus, one should strategize and do due diligence before trading futures and understand both their advantages as well as their risks.

Advantages of Trading Futures vs. Stocks (2024)


Advantages of Trading Futures vs. Stocks? ›

stocks is leverage. Most stocks only offer 25% day trading or 50% overnight margin when buying or shorting a stock. With futures you can put up less than 5% to control a position that represents a major market index or commodity which allows for potentially greater profits.

What are the pros and cons of futures trading? ›

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.

Why do people buy futures instead of stocks? ›

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.

What are the advantages of futures options over spot options? ›

Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track. Be sure to understand all risks involved before trading futures.

What are the advantages and disadvantages of futures compared to forwards? ›

Differences Between Futures and Forwards
No counterparty risk, since payment is guaranteed by the exchange clearing houseCredit default risk, since it is privately negotiated, and fully dependent on the counterparty for payment
Actively tradedNon-transferrable
RegulatedNot regulated
2 more rows

What is the advantage of futures trading? ›

While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks. These advantages include greater leverage, lower trading costs, and longer trading hours.

What are the downsides of futures trading? ›

Market Risk: The most obvious risk with futures trading is that prices can be highly volatile, and changes are can be swift, adverse, and devastating. 11 This is because the market risk is magnified by leverage, when there's already enough to worry about when supply and demand shift.

What are the advantages of futures over equity? ›

Low Execution Cost. To own a futures contract, an investor only has to put up a small fraction of the value of the contract (usually around 10%) as margin. The margin required to hold a futures contract is therefore small and if he has predicted the market movement correctly, he receives huge profits.

Why are futures banned? ›

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).

Are futures more profitable? ›

Neither market inherently offers more profitability than the other. However, here are some factors to consider: Trading Capital: Spot trading, especially with high leverage, might require less initial capital than futures trading.

Which is more profitable futures or options or stocks? ›

Stocks offer high-risk, high-reward potential, while options take that a couple notches higher, with the possibility to double or triple your money (or more) at the risk of losing it all, often in the matter of a few weeks or months.

Which trading is best for beginners? ›

Overview: Swing trading is an excellent starting point for beginners. It strikes a balance between the fast-paced day trading and long-term investing.

What are the risks of futures contracts? ›

Level of liquidity in a contract can impact the decision to trade or not. Even if a trader arrives at a strong trading view, he may not be able to execute the strategy due to lack of liquidity. There may not be enough opposite interest in the market at the right price to initiate a trade.

What is the big disadvantage of hedging with futures? ›

While futures can provide a potential hedge for some situations, they also carry risks like potentially reducing the overall increase of your portfolio value or creating significant loss.

Are futures more risky than forwards? ›

There is less oversight for forward contracts as privately negotiated, while futures are regulated by the Commodity Futures Trading Commission (CFTC). Forwards have more counterparty risk than futures.

Is trading futures a good way to make money? ›

In the world of futures trading, success can mean significant profits—but mistakes can be extremely costly. That's why it's so important to have a strategy in place before you start trading.

Is futures trading good for beginners? ›

Futures investing is found in a variety of markets, such as stocks and commodities, but it's not for beginners.

Can you go into debt with futures trading? ›

Unlike more traditional financial products, a futures contract can lead you into debt. Traditional financial investments, such as stocks and bonds, have front end risks. This means that you establish your maximum exposure when buying the investment.

Are futures worth investing in? ›

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).

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