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The Differences Between Stocks and Futures

April 25, 2017 by Daniels Trading| Futures 101

When it comes to deciding between stocks and futures, it’s not like you are suddenly between a rock and a hard place. That’s because both investment vehicles have their unique risks and rewards.

Most people are more familiar with investing in stock markets than investing in futures markets. They know the basics of equities, including that when you invest in a company, you’re buying a piece of it, or a “share.” And you can hold those shares outright or through mutual funds.

With futures, you are not investing in a corporate entity. Instead, you’re buying a contract to have exposure to physical assets, ranging from corn or soybeans to coffee or oil. You may also buy futures contracts to cover stocks, bonds, currencies, even the weather. In stocks, you may well hold that share certificate in your hand, or at least see the security represented in your online account.

In futures trading, however, you don’t want to wake up one morning and find a truckload of pork bellies in your driveway. Because with futures, it’s unlikely you want to take physical delivery of the commodity you’re investing in.

Stocks and futures do have some similarities. Whether you’re buying shares or futures contracts, you’re likely working with a broker. Both types of transactions are facilitated through an exchange, such as the New York Stock Exchange for stocks or the Chicago Mercantile Exchange for futures.

For many people, investing in futures is a way to diversify into a much different investment sphere — one that requires using diverse strategies.

Whether prices are rising or falling, our experts are here to help you discover opportunities in the futures markets across all major asset classes.Sign up for a consultation.…

When you invest in equities, the number of shares offered by a company is finite, until they decide to sell more on the market. Stocks don’t typically expire while the company is a going concern. So, “buying and holding” is a common strategy for long-term equity investors. But with futures contracts, you agree to buy or sell a commodity at a future date. With futures, it’s not about the buying and holding, rather it’s a technique that involves entering and exiting the market.

When you buy a stock, the money will be withdrawn from your account at the time of purchase. But with futures, your broker will require a certain amount of cash up front, called margin, to cover any potential losses.

If you’re familiar with moving anything heavy, it’s good to have leverage. One of the biggest advantages of investing in futures is that you put down a relatively small deposit to gain leverage over a larger asset.

Here’s how it works. Let’s say you want to invest in the gold market but don’t want to hold the precious metal in your hands. Instead, you may buy a futures contract covering 100 ounces of gold. In our scenario, gold is trading at $1,250 an ounce.

The exchange you are dealing with might have a margin requirement of $4,950. If you do the math, you can see with an original investment of less than $5,000 you have leverage over $125,000 worth of gold. Then the trick is knowing when to exit the contract to make a profit or to avoid losses as the price of gold — the underlying asset — fluctuates.

To sum up, investing in stocks or futures entails different sets of risks and rewards. But as always, investors in either vehicle need to stay informed, including working with a financial advisor to ensure they’re making the right choices.

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Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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