Make money with stock investing


Stocks and Futures - What is the difference?

Are you new to trading? Perhaps you wondercommodities, such as Soybeans, or a
what the difference is between tradingservice, like interest rates, from producers.
Stocks and trading Futures. Often when I meet
someone new who inquires as to what I do, ITo buy stocks, you only need enough money in
get a response of "that's like tradingyour account to purchase the stock outright
stocks,  isn't  it?"plus commissions. Once you make the
purchase, the money is removed immediately to
In some ways they are similar, but onlymake the purchase. With trading futures,
minutely so. So let's consider some of thesince you are not actually purchasing
major  differences  between  the  two.anything but simply entering a contract to do
so at a later time (which you will exit
Most individuals have likely traded stocks atprior to avoid delivery), the broker will
one time or another. Usually, it is to buyrequire a certain amount of margin (good
in order to 'own' a percentage of afaith deposit to cover any possible losses)
particular company or to liquidate suchin what is called a 'margin account'. Each
partial ownership. They pick up a phone tocommodity has a different minimum margin
call a broker or go online to purchase orrequirement depending on several factors.
sell. The order is facilitated through anYour broker may use the exchange calculated
'exchange', such as the New York Stockmargin or require a different margin of their
Exchange  for  example.own. If the value of the commodity were to
decrease and you are on the buy side of the
Buying and selling Futures is similar in thiscontract, then your contract has lost value
respect. You can call a broker or go onlineand your broker will notify you if your
to buy or sell Futures contracts. The orderunrealized losses exceeds have gone beyond
is then facilitated througha commodityyour minimum margin requirement. This is
exchange, such as the Chicago Merchatilecalled a 'margin call'. Naturally you would
Exchange for example. Yet while buying awant to have more capital than simply the
stock gives you part ownership in a companymargin amount when trading futures to avoid
or portfolio of companies (as in a fund),these broker calls. The broker has the
buying a Futures contract does not give youright (and likely will) liquidate your
ownership of a commodity or product. Rather,position if you are getting too close to
you are simply entering into a contract tonot having enough to cover the losses in
purchase the underlying commodity at aorder  to  protect  themselves.
certain price at a future time, noted by the
contract. For example, buying one May WheatWith buying stocks outright, there is no
at 3.00 simply creates a contract betweenpotential for a margin call. You simply own
you and the seller (whom you need not know asthe stock outright. So perhaps you may be
this is taken care of via the exchange)wondering why anyone would bother buying
that come May you will take delivery of 5000futures contracts rather than stocks. The
bushels of Wheat at $3 per bushel,major  answer  is:  LEVERAGE.
regardless of what the price of Wheat at
market happens to be come May. As aLeverage gives the trader the ability to
speculator simply trading to make a profitcontrol a large amount of money (or
from trading itself and with no interest incommodity worth a lot of money) with very
actually taking delivery of product, you willlittle money. For example, if Live Cattle
simply sell your contract prior to deliveryfutures requires a minimum margin of $800
at the going market price and the differenceto trade a single contract, and a single
between your buy price and sell price iscontract represents 40,000 lbs at the
either  your  profit  or  loss.current market price of say 75, you would be
controlling $30,000 worth for a leverage of
When you buy a stock, you are part owner of aover 35:1. This is appealing to many
company. When you buy a Futures contract,traders and justifies the risk. What is that
you simply are entering a contract. Withrisk? Just as leverage can work in your
stocks, you will pay for the stock at thefavor, it can work against you at the very
time of your purchase plus brokersame  ratio.  Known  as  a 'two-edged sword'.
commissions. When buying a futures contract,
you are simply entering the buy side of aYou can increase the leverage of trading
contract and no monies is paid other thanstocks if you trade with a margin account.
commissions  to  your  broker.This usually allows you to purchase stocks on
margin at the usual rate of 50%. So for
Stock exchanges and commodity exchanges areevery dollar you have you can purchase $2
both membership organizations establishedworth of stock. The leverage is 2:1. How this
to act as middlemen between the buys andworks is that the broker is actually
sells of all types of traders, from business'lending' you the other 50%. Of course by
entities to the individual small trader.purchasing stock with margin you can lose
The stock exchange act to bring capital frommore than you have due to the leverage. And
investors to the businesses that need thatin this case you can end up getting a
capital. They facilitate the transfer of'margin call' from your broker if your stock
property rights (ownership in the variouslosses too much value. But trading stocks
companies offering stock).The commoditycomes no where close to the kind of
exchange act to bring people willing toleverage  you  get  trading  Futures.
assume risk for the opportunity to make a
substantial amount of money for taking suchWhen you look at these two trading vehicles,
risk. This helps transfer the price riskthe bottom line comes to MARGIN and
associated with ownership of variousLEVERAGE.



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