Futures vs Stocks

      Many investors have stock accounts and feel comfortable purchasing shares of a particular company or an exchange-traded fund (ETF). However, when it comes to trading, there are some advantages to trading futures contracts instead of equities.

      1. Leverage

      • Whether you are buying shares of an individual company or an ETF, one must have an initial minimum deposit of 50% of the total asset being purchased.
        • For example, buying 100 shares of IBM at $30 ($3000 total purchase) would require a minimum of $1500 of available cash.
      • Futures traders that hold a position overnight are required to post a margin deposit (also called a “performance bond”) associated with that specific contract.
        • For example, buying 1 Emini-S&P Futures contract (total value of about $50,000) would require approximately $5600 (as of March 31st, 2010). While these overnight margin requirements are subject to change, this example shows a minimum deposit of closer to 10% of the total asset being purchased.
      • Day-trading futures (defined by not having a position when the market closes) requires even less margin.

        Please consider the implications of leverage can be positive or negative depending on if the trade is a winner or loser.

      2. Tax Considerations

      • Securities such as ETFs are taxed on a very different basis than are E-mini stock index futures. Traders should consult their tax attorney for information application to their situation, but as a general rule, gains on ETFs are treated as capital gains.
      • The tax on these capital gains would vary depending on the holding period, but futures fall under Section 1256 of the tax code. This means 60% of the gains are treated as long-term capital gains and 40 percent of the gains are treated as short-term capital gains regardless of the holding period.

      3. Additional Advantages

      • Beyond leverage and tax considerations, there are a number of other advantages to trading futures over stocks such as liquidity. To learn more, watch the introductory video below.


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