8 Reasons to Trade Futures vs Stocks

By NinjaTrader


Highly liquid and tradeable nearly around the clock, equity index futures provide an alternative to the traditional stock market for both new & experienced traders. With trading volume at record highs and growing, here are 8 reasons traders may choose futures versus stocks.

  1. Minimum Investment Required - With a significantly lower financial commitment required, futures offer a unique opportunity for new traders to enter the market. For Wall Street speculators in particular, Micro E-mini equity index futures allow traders to get started at a fraction of the cost with minimal risk capital and low margins. While opening a margin stock trading account requires at least a $25,000 balance to actively day trade, you can open a futures account with under $500. Through NinjaTrader Brokerage, the account minimum is only $400 with $50 margins to trade Micro futures. 
  2. Leverage - Futures trading provides the ability to control high-value contracts with much smaller investments for boosted buying power. Known as leverage, the use of borrowed capital gives you the power to control large positions with minimal risk capital. Please note: Financial leverage can result in losses greater than the initial margin and traders should be aware of the risks involved in trading futures.
  3. Trade Around the Clock - Compared to stocks & ETFs which have a regular trading session of only 6.5 hours 5 days a week, futures products trade nearly 24 hours a day, 6 days a week. This allows for more trading flexibility and the freedom to manage positions any time of day.
  4. Highly Liquid Markets - The majority of futures markets are highly liquid, making it easier to execute a trade quickly and at a desired price. Providing electronic access to a broad spectrum of products in a centralized arena, futures markets attract an ever-growing number of participants trading millions of contracts every day. Such a large presence of buyers and sellers means futures prices are less vulnerable to drastic price fluctuations and positions can be initiated & liquidated rapidly without significantly impacting price. Liquidity can be an issue when trading individual stocks and attempting to get a fill at a desired price. Additionally, due to the lower liquidity, these markets are more susceptible to rapid price swings influenced by institutional players.Although highly liquid, futures markets can also experience rapid price fluctuations and only risk capital should be used for trading.
  5. Level Playing Field - Futures markets are centralized and consolidated whereas equity markets are fragmented and much less transparent. With futures, all traders see the same transactions and volume information since all trades are transacted in a centralized market. Stock trading, on the other hand, takes place across dozens of exchanges. Liquidity and volume can be spread across several trading venues, obscuring volume data. Furthermore, dark pools, stock trading venues closed off to retail traders, account for an estimated 15% of trading volume. Additionally, when you “short sell” a futures contract, you are actually buying a contract to sell at a lower price in the future. In contrast to the stock market, no borrowing is necessary. This also contributes to a more level playing field between bulls and bears.
  6. Trade the Entire Market with Index Futures - Why trade individual stocks when you can trade the entire stock market? Equity index futures allow you to trade an entire market versus picking & choosing from countless individual stocks. For example, it is much simpler to take a long position in Nasdaq 100 futures than it is to purchase all 100 stocks in the index. With equity index futures gaining popularity year after year, traders continue to recognize the benefits of trading aggregate markets vs their individual elements. With E-mini & Micro E-mini equity index futures, traders can participate in the 4 most popular US stock indexes:
    1. S&P 500: Gain exposure to the most liquid US benchmark index (ES, MES)
    2. Nasdaq-100: Trade the top 100 non-financial companies listed on the Nasdaq exchange. (NQ, MNQ)
    3. Dow Jones Industrial Average: Speculate an index comprised of the 30 top American blue-chip companies. (YM, MYM)
    4. Russell 2000: Access the bottom 2,000 stocks within the Russell 3000 index. (RTY, M2K)7.
  7. Diversify Your Portfolio & Hedge Existing Positions - Futures traders can speculate multiple sectors of the economy including stock markets, metals, agriculture, bonds, energy, commodities and foreign currencies. The ability to diversify this broadly with a single asset class is unparalleled when compared with stocks alone. Additionally, futures are often used as a means of hedging. To offset risk, futures investors often trade multiple markets at once. For example, energy derivatives such as crude oil futures are commonly utilized by traders to both hedge risk in equity index exposure as well as diversify their portfolios.And since they can be traded long or short, futures offer the enhanced flexibility of seamlessly trading both sides of price action.
  8. Futures Tax Advantages - Some of the most substantial benefits of trading futures vs stocks are the tax advantages. Futures tax advantages include:
    1. Capital Gains Advantages – Using the 60/40 rule for short term capital gains, futures traders can retain more than 5% of profits when tax time comes.
    2. Capital Losses Advantages – The 60/40 rule also applies to capital losses incurred from futures trading. Additionally, futures traders can carry back losses up to 3 years to offset gains from previous tax years.
    3. Futures Exempt from the Wash Sale Rule – The wash sale rule prevents a stock trader from claiming a loss he repurchases the same stock shortly after taking a loss on it. While this presents a significant tax obstacle for equites traders, the wash sale rule does not apply to futures traders.

Learn 5 reasons to day trade futures vs stocks in this 3-minute video:


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