| |
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 |
Set
by corporate charter. There are, however, position limits and
position accountability in stock index futures |
| Investing |
Can
be traded in expectation of making a profit, but can be a zero
sum game |
Long-term
positive expectation of return, but no guarantee of profit |
| 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 |
| Leverage |
Highly
leveraged |
May
be leveraged if purchased on margin, with a 50 percent margin
being the standard (considered a loan from broker with interest
required) |
| 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, the accounts are debited or credited
accordingly |
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 |
There
is no expiration as such |
| 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 |
