Futures vs Stocks: What’s the Difference? – A Quick Information

When looking at the differences, similarities and benefits of trading futures vs. stocks, I believe we need to explore real world, well documented examples of meaningful volatility events that impacted both futures market prices and stock product prices in much different manners.

According to Statista.com assets in Exchange Traded Funds, “ETFs”, have grown to roughly $5.5 trillion dollars since their inception. Exchange Traded Funds were meant to challenge the $25 trillion dollar Mutual Fund Market which was the only market in which you could achieve broad class diversity outside of individual stocks. The problem that ETFs were designed to overcome, which was the hallmark of mutual funds, was that mutual funds could only settle on the close of daily business at their Net Asset Value or “NAV”.

Broad diversification across market sectors could only be purchased or sold at the close of business based on the equity, bond or raw material elements included in the weighted averages of every component of the sector mutual fund—ETFs solved that problem.

The first Exchange Traded Fund, the Spider or “SPDR”, was the S&P 500 depository receipt, which was designed to track the S&P 500 stock market Index and began trading in January of 1993 NYSE: SPY. No longer could an investor achieve broad market exposure on just the close of business, but could now buy and sell the broad market at any time throughout the trading day.

Market makers and specialists provided liquidity for ETFs and continue to do so.

May 2010

Here is an example of an event that highlighted futures vs. stocks perspective during a Period of high volatility. During the May 2010 so called “Flash Crash” , the NYSE cancelled all trades that were more than 60% away from pre-crash prices, leaving some with dangerous consequences.

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Exchange Traded

This was arbitrary and arguably covered up liquidity issues at the largest stock exchange in the world. No E-Mini S&P 500, E-Mini Dow 30, E-mini Nasdaq 100 or Mini Russell 2000 Futures trades were cancelled as a result of this market event. None of the above futures contracts were even down 10%. The Dow Future contract was down 5.7% at its worst.  Trading stocks vs futures during the “Flash Crash” saw a number of investors explore trading opportunities in Futures vs stocks Fast Forward to August 24th 2015.

Several ETFs were down double digit percentages and not even trading. Yet, the weighted stocks that made up the ETFs value were only down a few percentage points. According to FactSet, the IShares Dividend ETF NASDAQ: DVY was down 35% while the combined values of the stocks held in that ETF were only down 2.7 %.

One of the possible reasons for this disparity? Market makers backed away and pulled their bids creating an enormously wide bid and offer spread which is symptomatic of an illiquid market. A wider bid and offer spread creates a situation where the small investor pays more than an issue is worth by paying an inflated price at the ask and receives less in return for selling at a bid price that is less than the issue is worth.

market mayhem

Futures contracts are a contractual agreement to buy or sell a standardized size at a price to either make or take delivery.

Here is a comparison chart, Pro’s and Cons of each product, Stocks vs. Futures

Stocks and ETF’s      –       Equity Index Futures

Market makers                                                          No Market Makers

Specialists                                                                  No Specialists

Downtick rule for sellers                                         No Down Tick Rule to Sell

Affirmative Determination To Sell Short            Sell Short, No questions asked

Interest charges for sellers                                     No Interest charges

Less liquidity at 4.

Day trades Taxed as Short term                            Day Trades taxed 60% short term, 40% long Gains.

U.S. Government Regulated Exchanges              U.S. Government Regulated Exchanges

SPDR, QQQ, SPY and stocks are all traded during normal and extended trading hours of 6 AM to 8PM Eastern, whereas all futures are traded virtually around the clock. 6PM to 5PM Sun-Fri Eastern or NY Time.

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Dollars and Sense

SPY 449.45 per share X 500 shares =$224,725.00

Minimum Account Balance under the Pattern Day Trading rule $25,000.00 opening account balance

(a pattern day trader is one who trades in and out more than 4 times per day)

Cash amount required to Day trade= $25000.00

Amount required to trade on Margin Fed Reg T 50% rule= $112,362.50

(a pattern day trader is one who trades in and out more than 4 times per day)

Value of a $1 move 449.45 to 450.45= $500.00

Commission: free

E-Mini S&P ESU21

4494.50 X $50.00 = $224725.00

Cash amount required to trade = $2500.00 Opening account Balance

Day Trade Margin=$500.00

With the cash required to trade above, $112,362.50

Controlling $224725.00 of the ETF Index, in futures you can trade (112362.50 divided by 500(day trade margin) =224.725 contracts)

Rounding to 225 contracts, you are controlling

225 x 4495.50 x 50 =$50,574,375.00 in Equity!

Value of a $1 move equivalent 4494.50 to 4495.50 = $11,250.00

Commission, Exchange and regulatory fees : $5.00 per contract

Such a difference a decimal or two make!


Margin in the Securities Industry is a term used to describe taking a loan from the Clearing organization to purchase a stock, ETF or other asset. A Margin account is required to sell a security or ETF short. You cannot margin securities in an IRA account as the IRS prohibits charging Interest in a retirement account or qualified retirement plan.

Margin in the Futures industry refers to a good faith deposit, rather than a loan amount. You can sell a futures contract even if you don’t own it without incurring an interest expense because you are not taking out a loan. There are no restrictions by the IRS prohibiting Futures trading in a qualified plan or Individual retirement account.

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So with a 20,000.00 Stock Brokerage account, you can purchase 88 shares on margin or 44 shares in a cash account and cannot day trade more than three times. With a 20,000.00 Futures Brokerage account,  you can trade 40 contracts at a time or (let’s calculate the notional value of 40 x 4494.50 x 50 contracts) $8,989,000 worth of equity,

Call a Cannon Broker at 800-454-9572 if you have any questions about Futures VS Stocks

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors.  Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

© 2023, Aron Walter. All rights reserved.

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