Stock Futures Versus Traditional Stocks

Both stock futures and traditional stocks can present traders with some unique opportunities. Both of these investment vehicles have some advantages and disadvantages that you should know about. Here are the basics of stock futures and traditional stocks and some of the differences between them.

Traditional Stock

Traditional stock is a security that is more commonly traded than stock futures. With traditional stock, you are purchasing a portion of ownership in a company. When you purchase traditional stock, you are going to have voters rights in the company as well as the ability to receive regular dividends. With stock, you can easily trade it through any stockbroker and stock exchange.

Stock Futures

Stock futures are a completely different type of security. With stock futures, you are not actually purchasing any stock. Therefore, you do not have any of the shareholder rights that come with a stock purchase. You are not going to be able to receive any dividends or have any voting rights in the company. When you get involved with stock futures, you are essentially going to be working with a contract to purchase stock. A stock futures agreement takes place between a buyer and a seller. Both parties come to an agreement as to how many shares of stock are going to be sold, the price that they will be sold, and the exact date and time that they will be sold. This means that you are agreeing to purchase the stock at a future time. This is done by investors so that they can decrease volatility and take advantage of market movements. For example, if you own a futures contract on a particular stock, you can be in a potentially lucrative position if the stock increases in value. You will have a contract to purchase the stock at a much cheaper price than what is available in the market. You could then sell this contract on the secondary market or you could purchase the shares yourself.

Leveraging

Trading with stock futures makes it much easier for individual traders to use margin. It is possible to trade with margin when trading regular stocks. However, the process is much more difficult and costly. When you trade regular stocks with margin, you are essentially borrowing money from a broker and you will have to pay interest on the money that you borrow. With stock futures, you will only have to make a small deposit because you are not actually purchasing any stock.

Going Short

If you want to go short on a particular stock, it will be much easier for you to do so with stock futures. When you try to go short with traditional stocks, you have to first borrow the actual stock from your stockbroker. They will make you pay fees and dividends during this period. With futures, you can simply write a contract to go short without any of these problems.

High Risk

Stock futures are also more risky than traditional stock. With traditional stock, the most money that you could lose is the amount that you invest. With stock futures, you could potentially lose more than you invest because of the leverage involved.

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