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 trading futures options? ›

Advantages of futures trading include access to leverage and hedging while disadvantages include overleveraging and challenges presented by expiry dates. Choose a futures trading platform that is intuitive, offers multiple order types, and has competitive fees and commissions.

What are the advantages and disadvantages of futures? ›

Future contracts have numerous advantages and disadvantages. 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.

What is the main benefit of using futures for day trading? ›

As a futures trader, you can express your opinion long or short multiple times a day or week and you do not have to worry about day trading restrictions applicable to equities or the ability to take a short position in the market. So why miss out on another opportunity because of restrictions? Make a move into futures.

What are the advantages of futures vs forwards? ›

Yes, futures contracts are settled daily. That means these derivatives can be bought or sold at any time - you know the current price and can work with this information. Futures' settlement is not tied to a specific date, which makes them more flexible financial tools than forwards that are settled only at maturity.

What are the advantages of trading futures vs stocks? ›

Here we will discuss the many key advantages of trading futures vs. stocks including increased leverage, 24-hour trading, unrestricted shorting, tax advantages and trading on a level playing field just to name a few.

Why is futures trading better than options? ›

The choice between futures and options depends on your investment goals and risk tolerance – Both instruments can be used for hedging, but options offer more flexibility and limited risk. Futures offer higher potential profits but also higher risk, while options provide limited profit potential with capped losses.

Why options have an advantage over futures? ›

In a Futures contract, there is an obligation to buy or sell assets at a predetermined price and time. Options, however, give the buyer the right but not the obligation to trade . They carry great potential for making substantial profits.

Is futures trading good or bad? ›

Yes, it is possible to lose more money than you initially invested in futures trading. This is because futures contracts are leveraged, which means you can control a large position with a relatively small amount of investment upfront. 9 While leverage can amplify your gains, it can also magnify your losses.

What is the advantage of futures over spot? ›

Buying futures instead of spot can provide advantages like leverage, hedging, speculation, and access to more markets, but it involves higher risk and complexity.

Should I day trade options or futures? ›

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.

Do day traders use futures? ›

Day trading futures involves the purchase and sale of futures contracts within the same trading day, with the aim of profiting from small price movements. This practice appeals to traders for several reasons, including: Liquidity: Futures markets offer high liquidity, ensuring ease of entry and exit.

Why do traders look at futures? ›

Futures look into the future to "lock in" a future price or try to predict where something will be in the future; hence the name. Since there are futures on the indexes (S&P 500, Dow 30, NASDAQ 100, Russell 2000) that trade virtually 24 hours a day, we can watch the index futures to get a feel for market direction.

What are the pros and cons of futures trading? ›

Pros and Cons of Futures
Investors can speculate with futures price in the direction of the underlying asset price in the marketIt involves risks and speculators can lose even their initial margin (because futures use leverage) if price swings the other way
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Why are futures beneficial? ›

Narrator: One use of a futures contract is to allow a business or individual to navigate risk and uncertainty. Prices are always changing, but with a futures contract, people can lock in a fixed price to buy or sell at a future date. Locking in a price lessens the risk of being negatively impacted by price change.

What would be one of the major advantage of futures contracts? ›

One of the key benefits of futures trading is leverage. In other words, one of the major advantages of trading futures is that you can pay a margin and get the same benefit of buying the entire quantity of stock. The other advantages of trading futures include speculation, arbitrage, hedging, etc.

What are the risks of futures options trading? ›

One of the simplest and commonest risks of futures trading is the price risk. For example, if you buy futures, you expect the price to go up. However, if the price goes down, you are at risk of loss. For futures traders, the biggest risks of futures trading come from the adverse movement of prices.

Why do people lose money in futures and options? ›

As options approach their expiration date, they lose value due to time decay (theta). The closer an option is to expiration, the faster its time value erodes. If the underlying asset's price doesn't move in the desired direction quickly enough, options buyers can suffer losses as the time value diminishes.

What is safer futures or options? ›

1. Which one is safer futures or options? Options are generally considered safer than futures because the potential loss in options trading is limited to the premium paid, whereas futures carry higher risk due to potential unlimited losses resulting from leverage and market movements.

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