Futures vs. Stocks

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.

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 day’s 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