Futures vs stocks and what sets them apart? Both are well-recognized and widely used investment methods in the financial market that have so many significant differences. Basically, one involves partial ownership of one or more companies, while the other is an agreement to trade an underlying asset on a certain date for an agreed price.
When seeking to increase your income, investments in different financial markets appear as a viable option for a large number of people. However, everyone tends to have a preference for one or another investment method, as there are unique advantages and disadvantages to each of them.
If you are looking for your personal best option to trade in the markets, you should really study these and other forms of investment thoroughly, as one of them may speak to you more than the other. Each trader should analyze his or her own personality, including goals, experience and risk tolerance, before jumping into investing in a particular market.
The futures vs stocks question is a good starting point to begin to identify the particularities of each financial instrument and how you can adapt more or less easily to the requirements of each of them.
Below, we will review some aspects of each of these:
What are Futures?
Futures are financial contracts to buy or sell an asset at a specified date in the future for a fixed price. It is a financial asset that is part of the derivatives market, which means that the contract takes the value of a separate asset: shares, commodities, indexes or cryptocurrencies; and subsequently, through speculation, a price that it could be in the future is agreed upon.
Futures entered into the market to allow buyers to transact goods in the present while allowing them to cash in on these goods purchased at a later date. Buyers could lock in the current price for goods delivered at a future date.
This trading practice was also made to benefit sellers. Sometimes, sellers are not yet ready to dispose of their items. This is when futures become really useful, as it allows sellers to lock in a price for a future sale. In short, both sellers and futures buyers are able to limit their price risk.
Trading futures involves transacting these contracts in relation to the asset being traded. The buyer of the contract is obliged to take possession of the underlying on which it is agreed once it reaches its expiration date. However, while the contract is ongoing, the buyer can sell the position and free him or herself from the obligation.
A main difference between futures vs stocks is the possibility to trade with leverage. Leverage is a tool specific to the futures market that provides traders with the power to control a high value contract with a much smaller investment through the use of borrowed capital. This gives the trader additional purchasing power and allows them to control larger positions with minimal capital risk.
What are Stocks?
Stocks represent a percentage of ownership in a company or group of companies. By investing in a stock in the market, the buyer exchanges money for the ownership of a part of a company. In this way, the purchaser becomes a shareholder in the group that owns the company.
When a company or group requires more capital to expand or improve its economic situation, a certain portion of the company or group is often put up for sale. In this way, whoever buys that portion becomes the beneficiary of its profits or responsible for its losses, depending on the proportion of ownership, as the shares increase or decrease in price.
The main difference between futures vs stocks lies in the condition of being an owner or not, since by being a buyer of a futures contract one does not become an owner of the underlying asset. On the contrary, by buying a stock, the new owner becomes exposed to the performance of the company in question.
There are different types of stocks that can be purchased on the stock exchange. The type of stock purchased determines the degree of power, profit and participation that the buyer has over the company or group of companies, as well as the rights he or she has over his or her share.
The price of the stocks is initially calculated based on the total capital contributed by the initial partners divided by the number of shares to be issued. However, once they enter the stock exchange, the price of these will be subject to the law of supply and demand.
In this sense, speculation on stock market values follows the same logic as speculation on the futures market. However, following the futures vs stocks comparison, the price at which stocks are bought or sold is totally determined by the market, while futures agree on a price for a given date, regardless of the value it takes in the market at that time.
Futures vs Stocks: Pros and Cons
In the comparison of futures vs stocks, one of the biggest differences lies in the ownership of the asset being traded. This can be seen as an advantage or disadvantage, depending on what happens in the market.
On the one hand, it usually takes more money to buy stocks than to trade futures. At the same time, if the value of the stocks rises, whoever owns a part of them will tend to make bigger profits than other types of investors. On the other hand, if the value of the stocks goes down, he or she will see the bigger losses as well. In this sense, exposure to market volatility is greater.
When trading futures, you can speculate without being the owner of the asset and the obligation that comes with it. For example, you can speculate with gold or oil without actually owning these types of assets, which tends to be very expensive.
Futures trading gives traders the opportunity to trade with leverage. And what do we mean by leverage? Well, leverage is the ability to control a high value contract with a much smaller investment through the use of borrowed capital. This gives them additional purchasing power and allows them to control larger positions with minimal capital.
At the same time, high leverage means more risk, because just as it can result in more income, it can also lead to a bigger loss. While leverage is what makes futures trading so opportunistic, it is also extremely crucial that traders understand how it works, as well as the role of margins in futures trading.
In this sense, we can see that when facing the futures vs stocks question, we can definitely see some similarities. Both are variable income assets, so they do not assure profitability to those who invest in them, since they are subject to market volatility.
However, trading futures allows the commitment to be made for a specific time, and in a proportion according to the trader's available money, since there are different contract sizes. In contrast, stocks have a fixed value and imply the total possession of them, at least until they can be sold.
Nevertheless, both the futures market and the stock market have liquidity. This means that there are a large number of buyers and sellers willing to trade, which facilitates faster transactions and the possibility of obtaining good prices.
Do keep in mind, futures have the additional advantage of making it possible to trade almost around the clock: 7 days a week and almost 24 hours a day. As for the stock exchange, it usually has more restricted hours, according to each country.
Finally, when comparing futures vs stocks, it is worth noting that the investment in stocks is long term, while in futures it can be both long and short term. This makes the futures market more flexible to the needs and strategy of each trader.
Either of these two investment methods requires prior study, perseverance and discipline to see favorable results in one's personal finances. In our opinion, the futures market offers some advantages that distinguish it from the rest of the investment methods available.
At Uprofit, we have evaluation programs so that every trader can test their capabilities in futures trading with fair and clear conditions. Thus, you can decide between futures vs stocks by testing one of these alternatives without risking your own capital.