People who are new to futures markets are sometimes unclear about the differences between futures and stocks. Although futures and stocks do have some things in common, they are based on quite different premises. Futures are contracts with expiration dates, while stocks represent ownership in a company. The following chart may help delineate the major differences between them.
Factors: | Futures | Stocks |
---|---|---|
Trading |
Traded at an organized exchange | Traded at an organized exchange or over-the-counter |
Represents |
A commitment to buy or sell something in the future at an agreed upon price. | Ownership of a corporation |
Issued by |
A futures exchange, which writes the terms of each contract and makes it available for trading, but does not specifically issue it. Buyers and sellers create an obligation when they enter into futures contracts. | A corporation |
Maximum number that can be issued |
No limit to the number of futures contracts that can be issued. | Set by corporate charter. There are, however, position limits and position accountability in stock index futures. |
Cash Flows |
In and out flows to traders accounts are based on daily marking to market – a debiting or crediting of each futures account based on that days changes in the price of the contract(s) held in each account. | May receive dividends |
Ability to Sell Short |
Yes, as easily as buying long; no uptick in price necessary. | Permitted under special circumstances. A short sale can only be made on an uptick – when the stock price has gone up a tick. |
Time |
Typically short term Fixed maturity/expiration date, usually less than one year. | Typically, but not always, long term. Stocks are perpetual instruments so long as the underlying company remains solvent. |
Money |
Buyers and sellers deposit a designated performance bond in an account; the amount is a percentage of the current value of the contract. As contract prices change (debited) you may be required to provide additional margin. | Buyer purchases shares. Margin may be paid as a down payment in some cases. Broker may ask for a margin call – a request for additional money from the person buying or selling on margin due to additional price changes in the stock. |
Monitoring |
Traders must be aware of expiration day and last trading time. | |
Risk |
Depending on price changes, more than the initial investment can be lost. | If the stock is not bought on margin the most that can be lost is the entire investment. |