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Stock futures difference
Are u new to trading?
Perhaps u wonder what difference is Bet. trading Stocks and trading Futures.
Often when I meet someone new who inquires as to what I do, I get response of
"that's like trading shares, isn't it?
In some ways they're similar, but only minutely so. So let's consider some of
major differences Bet. two .
Most individuals have likely traded shares at one time or another. Usually, it's
to buy in order to 'own' percentage of particular company or to liquidate such
partial ownership. They pick up phone to call broker or go online to purchase or
sell. The order is facilitated through an 'exchange', such as New York Stock
Exchange for example.
Buying and selling Futures is similar in this respect. You can call broker or go
online to buy or sell Futures contracts. The order is then facilitated through
commodity exchange, such as Chicago Merchatile Exchange for example. Yet while
buying share gives you part ownership in Comp. or portfolio of Comp. [as in
funds], buying Futures contract doesn't give u ownership of commodity or
product. Rather, u are simply entering into contract to purchase underlying
commodity at certain price at future time, noted by contract. For example,
buying one May Wheat at 3.OO simply creates contract Bet. u and seller [whom u
need not know as this is taken care of via exchanges] that come May u will take
delivery of 5OOO bushels of Wheat at $3 per bushel, regardless of what the price
of Wheat at market happens to be come May. As speculator simply trading to make
profit from trading itself and with no interest in actually taking delivery of
product, u will simply sell your contract prior to delivery at going market
price and difference Bet. your buy price and sell price is either your profit or
When u buy share, u are part owner of company. When u buy Futures contract, u
simply are entering contract. With stocks, u will pay for share at time of your
purchase plus broker commissions. When buying futures contract, u are simply
entering buy side of contract and no money is paid other than commissions to
Stock exchanges and commodity exchanges are both membership organizations
established to act as middlemen Bet. buys and sells of all types of traders,
from business entity to individual small trader. The share exchange act to bring
capital from investors to businesses that need that capital. They facilitate
transfer of property rights [ownership in various company offering shares]. The
commodity exchange act to bring people willing to assume risk for opportunity to
make substantial amount of money for taking such risk. This helps transfer price
risk associated with ownership of various commodities, such as Soybeans, or
service, like interest rates, from producers.
To buy shares, u only need enough money in your Acc. to purchase stock outright
plus commissions. Once u make purchase, money is removed immediately to make
purchase. With trading futures, since you aren't actually purchasing anything
but simply entering contract to do so at later time [which u will exit prior to
avoid deliveries], the broker will require certain amount of margin [good faith
deposit to cover any possible losses] in what's called 'margin Acc.'. Each
commodity has different minimum margin requirement depending on several factors.
Your broker can use exchange calculated margin or require different margin of
their own. If value of commodity were to decrease and u are on buy side of
contract, then your contract has lost value and your broker will notify u if
your unrealized losses exceeds have gone beyond your minimum margin requirement.
This is called 'margin call'. Naturally u would want to have more capital than
simply margin amount when trading futures to avoid these broker calls. The
broker has right [and likely wills] liquidate your position if u are getting too
close to not having enough to cover losses in order to protect themselves.
With buying shares outright, there is no potential for margin call. You simply
own share outright. So perhaps u can be wondering why anyone would bother buying
futures contracts rather than shares. The major answer is: LEVERAGE.
Leverage gives trader ability to control large amount of money [or commodity
worth lot of moneys] with very little money. For example, if Live Cattle futures
requires minimum margin of $8OO to trade single contract, and single contract
represents 4O,OOO lbs at current market price of say 75, u would be controlling
$3O,OOO worth for leverage of over 35:I. This is appealing to many traders and
justify risk. What is that risk? Just as leverage can work in your favor, it can
work against u at very same ratio. Known as 'two-edged sword'.
You can increase leverage of trading shares if u trade with margin Acc.. This
usually allows u to purchase shares on margin at the usual rate of 5O%. So for
every dollar u have u can purchase $2 worth of share. The leverage is 2:I. How
this works is that broker is actually 'lending' u other 5O%. Of course by
purchasing share with margin u can lose more than u have due to leverage. And in
this case u can end up getting 'margin call' from your broker if your share
losses too much value. But trading shares comes no where close to kind of
leverage u get trading Futures.