Stocks Vs Futures
Stocks and futures present an opportunity for individuals to expand their investment portfolio and to grow their wealth.
Both of those instruments use formal exchanges, clearing houses, brokerages, have fees and commissions, and are bought and sold by clients as well. Though deemed similar on the surface, they have very distinct differences.
When one owns a stock, the stock owner has a share in the ownership of a company. One can have a claim on the company’s assets and earnings, thus the more shares you own, the bigger is your claim towards the company. Owning a stock of the company also entitles a holder to the dividends or splits declared by the company.
As you hold futures contract however, instead of owning part of a company, you are either buying or selling an asset. The underlying asset of futures can be currency, stock index and commodities. That’s why the term trading is widely used for futures as it involves, buying and selling.
To invest in stocks, you must invest upon the full value of the stock upfront, usually in one lot. One lot of stock can be 100 or 1000 shares depending. In Malaysia, generally one lot mostly refers to 1000 shares.
For futures trading, it is also known as margin trading, of which only a margin is needed to trade the full value of the contract. The margin usually ranges from 5 – 10% of the contract value.
A stock has no expiration date. This is in fact preferred by long term investors while they wait upon their investment to grow as the company grows in value.
Futures on the other hand have an expiration date. In the case of Bursa Derivatives Malaysia, you can enter a position up to 15 months depending on the type of products you are trading.
The losses for a stock are limited to the initial capital that was invested. However, you will not go into negative value unless the company you invested has declared bankruptcy.
On the other hand, since futures trading is margin trading, you can have additional losses beyond your initial investment, despite the contract having value.
Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.
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- Speak with a Licensed CMSR
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