Stock Market futures share significant differences which must be known if you are looking for a better fruitful investment option. There are many different ways of starting investment, each having their own risk factors, rate of returns, liquidity, market volatility, market cap, etc.
Stock market futures are currently one of the most popular investment options for a wide range of people around the world. In this article let us know major differences between Stock and Futures.
What are Stocks ?
Stocks are financial instruments used by investors to raise capital for a listed company on Stock Exchange Platform. It is purchased using money in the stock market. The Stock market is a place where multiple companies, rather small or big, offer their stock to the public.
The value of Stocks frequently changes and investors generally aim to buy these stocks at a low value cost and sell at a large value. With stocks you get to own a piece of a company by buying their stocks. Consumers and investors generally place their money on a company which has potential for significant growth.
What are Futures?
Futures is an investment option where agreements are made to sell an asset at a set price in future. Futures do not provide any ownership in the company unlike stocks. In futures investors agree to buy a financial instrument, commodity, bonds at a predetermined price.
The underlying assets can be a bond, currency, oil, gold, stock index or more. Profits and losses from the future come only from the price changes of the underlying asset.
Stock Market Futures: Key Takeaways
- Stock market is a place where different companies offer their stock to the public.
- Stock market is a long term investment while futures is a short term investment.
- Futures contracts are an agreement made to buy or sell an asset at a predetermined price in the future.
- Futures have expiration dates unlike stocks which allocate an ownership in the company.
Stock Market Futures: An Overview
Stock Market futures are two of the most widely used financial instruments in the world of investment. Both these instruments provide a significant return by following different approaches. However, Futures may seem riskier than stocks due to its leverage but many investors go toward future hedgers, market speculators with significant investment.
Both stock market futures are financial instruments which attract a whole lot of investors as they have the capacity to build fortunes. Stocks offer equity security as buying stock of a company gives you a part of ownership of the company where you benefit from the profit of the company. While futures are agreements made to buy a commodity or assets at an agreed upon price.
When you invest in stocks you buy a part of the company and earn from the frequent price movements. The buying and selling of a company’s stock is based on the movement of price. Investors buy at low prices and aim for higher prices. Stocks also offer dividends and are a long term investment method. You can sell your stock anytime when you think the company has no potential for growth.
When you invest in futures you sign a contract that you will pay a specified prize for an underlying asset on a future date. Futures contracts have an expiration date. Investors make a bet on the future price of an asset or commodities in the coming future. They are generally short term investments with one year or less time maturity.
Also, check, How to Invest in Stock Market?
Stock Market Futures: Which is Better?
The main aim of an investor is to maximise their profits but at the same time they must be careful with the risk factors that follow up in the process. Both Stocks and futures are favourable investment options for many investors out there. However, they both share a fair deal of risks.
Pros and Cons of investing in Stocks
Stocks have a potential of providing high returns especially when they are brought early in their lifespan. When you buy a stock you own a share of the company and receive dividends from the company’s profits.
Over the time if a company grows and performs well stock price rises which allow investors to earn through capital gains when they sell shares. However, the price of a company stock may fall from INR 500 to INR 200 in a year which can drive significant losses for investors.
Pros and Cons of investing in Futures Contracts
Futures contracts are a signed agreement to buy an underlying asset which include commodity, financial instruments, stock index, or more at an agreed upon price in the future. It allows investors to control large positions with a small capital or margin. Future contracts are used for hedging or market speculations.
Futures allow investors to invest in various assets such as commodities, currencies, stock indices, financial instruments and more. However, they possess greater risk due to leverage. Even small movement in price can amplify losses.
Also, check How to carry Stock Market Analysis?
Difference between Stock Market and Futures
There are some major differences between stocks and futures contracts. Futures are however used when you have enough or a good number of commodities or assets which can be listed in the stock .
| Futures | Stocks |
| Futures is an agreement made to buy a commodity or asset at an agreed upon price in the future. | Stocks are financial instruments used to buy an owner share of the company. |
| Futures are issued by the futures exchange and make it available for trading. | Stocks are issued by an organisation or corporation. |
| Futures are short term investment method. | Stocks are long term investment method |
| Futures do not promise any ownership in the company or asset. | Stocks provide a part of ownership to the investors. |
| The underlying asset can be bonds, oil, gold, stock index, currencies, stocks, etc. | The underlying asset is the equity of the company. |
| Futures contracts are highly leveraged financial instruments. | Stocks is not as leveraged as futures |
| Futures contracts have a fixed duration or expiration date. | Stocks are long term investment having no expiration date |
| Futures are more riskier due to leverage | Stocks are exposed to market risk |
| Futures do not pay any dividends to the stockholders | Stocks pay dividends to their stockholders |
| Futures contracts are primarily used for speculation or hedging | Stocks are used for long term investment or wealth accumulation |
| There is no physical asset involved only a stock in the ownership of company | Stocks are settled by cash when investors buy or sell a stock on the stock exchange. |
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Stock Market Futures FAQs
Q1. What is a futures contract?
Ans: Futures are a signed agreement where an investor agrees to buy an underlying asset such as commodities, financial instrument, stock index at an agreed upon price in the future.
Q2. Which is more riskier, Stocks or futures?
Ans: Stock Market futures both share their own risk factors. However, Futures are more riskier than stocks due to the leverage they hold on the underlying asset agreed price.
Q3. Is futures a long term investment?
Ans: Futures is a short term investment based on the agreed price of a fixed time in future and it comes with an expiration date.
Q4. Do stocks have an expiration date?
Ans: Stocks are long term investments where investors buy and sell a stock based on the current price movements or prediction. They have no expiration date unlike futures contracts.
