Why traders prefer equities over futures?

[Robert 10]

I find that most traders start of day trading stocks. What is the main attraction people turn towards stocks? Futures and forex offers more leverage and bang for the buck. Also commission is alot lower when trading futures.

 

Any thoughts on this?

[carter 10]

People are more familiar with stocks to begin with. Also alot of traders use futures as a leading indicator.

 

I also think there is a smaller percentage of successful futures traders compared to stocks.

[Soultrader 12]

Like Carter mentioned, I think people are not familiar with futures. Whenever someone asks me what I do for a living, I prefer to say I am a stock trader. When I mention futures, most people turn clueless so its saves me the time from explaining.

 

Although the leverage is good in futures, the risk is there also. Either way, I think if a trader can make money in the stock market he should be able to make money trading futures.... and vice versa.

[jperl 11]

Well, I think of my own background. I started out trading stocks back in the days when there were no electronic trading platforms, and you had to call a broker to do anything. Futures? what were those? something farmers and cattle ranchers used for hedging. Most brokers couldn't or wouldn't handle them. I eventually did start trading futures manually (calling a futures broker to make trades) but found that unlike stocks you had to be on top of what was happening on a daily basis or you could get nailed quickly. I stopped trading them because I wasn't ready to give up my day job. Today of course, with the ease of electronic trading, futures trading is in my humble opinion the best way to get the most bang for your buck. I'm a dedicated futures trader, and haven't looked back

[carter 10]

Well, I think of my own background. I started out trading stocks back in the days when there were no electronic trading platforms, and you had to call a broker to do anything. Futures? what were those? something farmers and cattle ranchers used for hedging. Most brokers couldn't or wouldn't handle them. I eventually did start trading futures manually (calling a futures broker to make trades) but found that unlike stocks you had to be on top of what was happening on a daily basis or you could get nailed quickly. I stopped trading them because I wasn't ready to give up my day job. Today of course, with the ease of electronic trading, futures trading is in my humble opinion the best way to get the most bang for your buck. I'm a dedicated futures trader, and haven't looked back

 

Very interesting jperl. Not excatly sure when electronic trading came into play... but you must be trading for quite some time now. Do you find the futures market an easier market to trade? What would you say the biggest difference is in terms of market concept. Thank you

[jperl 11]

Yes, I've been trading for more than 30 years. Electronic trading for the average trader didn't come into its own until the arrival of the internet.

As far as differences between stocks and futures, if I were to put up two live charts, one of an equity and another of a futures contracts, I doubt you could tell the difference. The real difference lies in the leverage you have. A $70000 futures contract for instance requires you to put up only $2000 to $3000 of capital compared to 50% for equities. That's a real difference.

[Follow The Trend 10]

I have dabbled in Futures and Traded options, but do not feel 100% comfortable with them.

 

I would not have the confidence to trade in decent size on the Futures and Options markets. With my current knowledge of Futures and Options I feel the risk / reward ration is not in my favour.

 

I do however feel a lot more confident buying stocks and would think nothing of opening a large position in a stock I was confident about.

 

Maybe I should take a closer look at Futures and Options............

[Maverick 10]

I have traded both futures and stocks for several years and my track record is much better in stocks. Maybe the difference is I swing trade stocks but trade futures on a one minute chart. Swing trading must agree with me.

[Soultrader 12]

Yes, I've been trading for more than 30 years. Electronic trading for the average trader didn't come into its own until the arrival of the internet.

As far as differences between stocks and futures, if I were to put up two live charts, one of an equity and another of a futures contracts, I doubt you could tell the difference. The real difference lies in the leverage you have. A $70000 futures contract for instance requires you to put up only $2000 to $3000 of capital compared to 50% for equities. That's a real difference.

 

I use alot of market profile in my market analysis and to understand balance from imbalance. I do not trade stocks but would like to know if the same market profile concept applies to the stock market? I trade the YM primarily and feel like the market is a complete auction. However, when I take a look at the stock market there seems to be alot more external things such as earnings, M&A, rumors, etc... I guess my question is: Can I apply the same market understanding/concept of the futures market into the stock market?

[Anonymous 11]

Personally I do not trade stocks and do not really know why a retail trader would want to. Especially if you are short term trader (read day trader). The account requirements are excessive, the tax implications are worse than futures (taxed at a higher rate), and you can't short on a down tick.

 

Having said that, I do understand that many people fear the futures markets. Even today, young traders , or new older ones, are warned to stay away from futures or, "you may end up with a dump truck full of corn on your front lawn". The idea of not being out by expiration and having to deliver, or take delivery of some product still worries many people.

 

As far as Market Profile goes, it should work in any freely traded market. I would be a little skeptical of some penny stocks, because of over-manipulation related to illiquidity issues.

 

BTW, the inherent nature of the stock market is to rise. This goes a long way for those who want to be optimistic and don't understand selling something they don't own in the first place. Before you ask, here are some reasons:

 

1. Companies use the stock market to raise capital. They use stock as defacto currency in acquisitions. Hence they need prices to go up.

 

2. Because stocks do have a monetary value, they need to keep pace with any rise in inflation. (yes, I know that inflation is nothing more than an increase in the money supply, but most people get this wrong. And assume rising prices is inflation. In truth it is not. Inflation may bring rising prices but it doesn't have too).

 

3. The role that mutual funds pay in a persons ability to retire at a certain predefined age is such that mutual funds need higher prices. The companies that do not pay workers past retirement, want those higher prices. This allows older workers (the ones that have higher salaries0 to retire, and they can higher younger workers at less cost. Government, which only want to provide the smallest "safety net" needs prices to rise so retirees need less subsidies.

 

4. Foreign capital seeks the highest rate of return. Rising stock market makes for attractive capital. The dollar is strong therefore as foreign capital enters an buys dollars to buy stocks. Strong dollar less inflationary. See 1 and 2.

 

There are more reasons but you get my point. As far as I am concerned, this is the reason to invest in the stock market and trade the futures market.

[wsam29 10]

Here's my take on stocks.

 

Mom and dad at the local hang out know their stock inside and out, they have an elaberate analysis system the do, whether it be fundamental, technical, hunches, tips, recommendations, etc. ABC stock makes widgets and gadgets and they can foresee the future as to how society will buy these widgets and gadgets which equates to profits for ABC company and their share holders.

 

Mom and dad can also talk themselves into a buy and hold strategy because widgets and gadgets will always be in demand by society.

 

Mom and dad cannot and will not admit wrong and fall into a false sense of security because all stocks appreiate in time, as long as they are blue chips that is.

 

The thought of acknowledging a loss is painful, even on paper, because that is what it is a "paper" loss because of things come back to break even (in their heads that is)

 

futures...contract between a buyer and seller. Now what would they know about what is causing these two people to trade? What do they know about corn, crude oil, hogs and lumber? Stories of people going bust trading futures and other derivatives adds to the ignorance.

 

There is a lack of education to begin with because futures are not promoted by banks and other companies due to the nature of the product and the associated risks involved with derivatives.

 

That's another thing, all derivatives have an expiration date. So the timing needs to be there as well.

[Nick1984 10]

I tend to see the situation as being:

 

a) The stock market is much more publicised in the media. The public is more familiar with them and has grown up with them. Here in Australia there's only one TV channel which features talks on futures contracts and thats primarily directed at farmers!

 

b) People feel more comfortable trading rumours. In stocks news and company announcements play a gigantic role in how you trade stocks (this could apply to commodity futures as well but most ppl here seem to trade financial futures where the markets are quite different).

 

Soul, i've followed your posts for a long time and I agree whole heartedly with you about price action being king and not relying too much on indicators. I think that yes you can take the strategies you have in financial futures markets and apply them to stock trading however as mentioned earlier you do need to account for the more 'human' aspect of stock trading i.e news and sentiment. Market profiling does work for stocks as well because a stock just like a future is a commodity like any other and we as consumers relate to it in terms of its "value".

[GCB 10]

I like most, started out in stocks and have moved completely to futures.

 

Why? Futures are just all around cleaner. They are built for trading. Day trading stocks is like trying to race in cars built for touring. Futures are built for speed.

 

The only advantage with stocks is that when the overall market is dead in the water there are alway several stocks that are running through the roof or the floor. The problem is finding those stocks before they make their move or as the move is beginning. That's the hard part.

 

The drawback with futures is the flip side. When the market is going nowhere there's nowhere to go. Unless you want to try oil or Euros. But what's your edge there?

 

Except for that, futures are better all the way across the board, e.g.:

 

1) High liquidity.

 

2) Better margin.

 

3) Fairer and cleaner fills.

 

4) No market makers. First come, first served in the e-minis.

 

5) Easier execution. Either buy or sell. No complicating "sell short" or "buy to cover" commands. Buy 1, then sell 2, and viola! you are short 1.

 

6) Easier to place limit orders as targets and stops on shorts. Many brokers will not allow you to enter more than one "buy to cover" order for the same shares of stocks. Thus you cannot place both a standing target and stop order for the same shares. Just makes things harder and they are hard enough.

 

7) No uptick rule on shorts. I once got filled 30 cents lower than my desired price on a market order short on a day traded stock. Needless to say that trade was a loser.

 

8) Lower commissions.

 

9) Lower tax rates. 60/40 longterm/shorterm taxation rule on futures.

 

10) Easier tax prepartion. A 1099 at the end of the year. No need to log all your trades for the IRS.

 

What did I leave out?

 

The catch? You trade against the best and they know what they are doing.

[The Bear 10]

I find that most traders start of day trading stocks. What is the main attraction people turn towards stocks? Futures and forex offers more leverage and bang for the buck. Also commission is alot lower when trading futures.

 

Any thoughts on this?

 

Because most people are investors, not speculators.

[dalby 10]

good point, bear.

 

myself- i TRADE futures, but most of investments are stocks (and a smattering of commodities)

 

futures for me are for speculation. in my trading account. to generate income

 

stocks are ownership of good companies in order to build longterm wealth

 

i take profits from my trading account, and put them into longterm stuff - stocks, bonds, gold, etc.

 

i think many traders eschew futures because they don't understand them, don't want to understand them, and feel more comfortable with a known entity.

 

and also, as mentioned - one needs to differentiate between investors and traders. a relatively high %age of traders use futures.

 

a VERY small %age of investors do.

[The Bear 10]

good point, bear.

 

myself- i TRADE futures, but most of investments are stocks (and a smattering of commodities)

 

futures for me are for speculation. in my trading account. to generate income

 

stocks are ownership of good companies in order to build longterm wealth

 

i take profits from my trading account, and put them into longterm stuff - stocks, bonds, gold, etc.

 

i think many traders eschew futures because they don't understand them, don't want to understand them, and feel more comfortable with a known entity.

 

and also, as mentioned - one needs to differentiate between investors and traders. a relatively high %age of traders use futures.

 

a VERY small %age of investors do.

 

Correct. You explained it. In terms of your activity, you are INVESTING in stocks when you care about the standing of the company (fundamentals), and use it as a wealth building strategy. You actually care about the thing you are investing in. When you put this hat on you are an INVESTOR.

 

When you start plunging in the futures market...trading for quick large gains (or losses), it is SPECULATION and you've put on your SPECULATOR hat. I could care less about the soybeans I sold or the live cattle i'm liable for. It could even be intermediate term too.

 

I'm impressed that you can do both. I hope one day I could understand the stock market like that. I still don't know what a PE ratio is. I have enough on my mind currently, to try and not get blown up in the commodities market.

 

Oh - in my opinion, the investor role doesn't exist in the futures market.

[dalby 10]

yea, my stock investing strategy is basically the grandma from idaho/warren buffet strategy

 

buying stocks of good companies with recognizable products, etc.,at good valuation. I also like to do the peter lynch thing and go to the mall and see what's hot.

 

i am also a firm believer in good management. i bought AAPL and PIXR both when steve jobs took over.

 

management is essential for longterm health of a company.

[dalby 10]

a good example of the product that's hot category is CROX

 

my wife works at a hospital and ALL the nurses started wearing these things

 

that gave a good heads up to do some DD

 

this was many many months ago before the stock took off

 

nurses are a "leading indicator"

[The Bear 10]

yea, my stock investing strategy is basically the grandma from idaho/warren buffet strategy

 

buying stocks of good companies with recognizable products, etc.,at good valuation. I also like to do the peter lynch thing and go to the mall and see what's hot.

 

i am also a firm believer in good management. i bought AAPL and PIXR both when steve jobs took over.

 

management is essential for longterm health of a company.

 

Grandma from idaho ha ha that's funny. Buy and hold with no stop. But hey, who am I to laugh if grandma's making the gains right? If it works it works.

 

As far as warren buffet, I have no respect for this guy, because he's 'anti-futures'.

[dalby 10]

also, grandma from idaho incorporates DCA not just BAH

 

there has never been a 20 yr period in history where DCA'ing has not been a good strategy , and in most periods it is in the top quintile of asset class performance as compared to real estate, bonds, metals, etc.

[AgeKay 10]

Buy and hold with no stop.

 

also known as "buy and hope".

[Guest forsearch]

Buy and hold with no stop.

 

also known as "buy and hope".

 

Or trading religiously.:helloooo:

[fpinero 10]

Hi,

 

I prefer to trade stocks due to the variety.

I trade again and again the same setup, so I need to have a great "universe" where look for my setup.

If I trade only a future (or a couple of them) the probabilities to found my setup are much lesser.

 

Quick reply, but this is my core reason.

 

Regards.

fpinero

[legout 10]

Hi,

 

I prefer to trade stocks due to the variety.

I trade again and again the same setup, so I need to have a great "universe" where look for my setup.

If I trade only a future (or a couple of them) the probabilities to found my setup are much lesser.

 

Quick reply, but this is my core reason.

 

Regards.

fpinero

 

I believe this to be a successful key to trading. fpinero has mastered one, maybe two setups, and sticks to it. If you trade futures, especially short timeframes, it's really easy to get 'sucked in' and start impulse trading. Of course you will be right sometimes, and that's what makes it even more dangerous!

 

legout

[Ivano 10]

I believe this to be a successful key to trading. fpinero has mastered one, maybe two setups, and sticks to it. If you trade futures, especially short timeframes, it's really easy to get 'sucked in' and start impulse trading. Of course you will be right sometimes, and that's what makes it even more dangerous!

 

legout

 

And it's just as dangerous when you lose and convince yourself to chase the upturn. That's why behavioral finance has gained so much attention lately.