In the stock market, two terms often confuse even experienced investors – future trading and stock trading. Nowadays, any trading app can help you learn and decide between the two types of trading. Both involve buying and selling, yet they are different in terms of operation, risks, and the strategy employed by the traders. Learning these differences will allow you to make wiser choices. Let’s break it down-

1. Ownership: What Are You Buying?

  • Stock Trading: When you buy and sell stocks, you’re actually buying and selling shares of a business. You own a piece of the business, even if it’s a tiny piece. If the firm performs well and expands, your stock grows in value.
  • Future Trading: In future trading, you’re not purchasing actual shares. Instead, you’re making a deal to buy or sell an asset at a future date and set price. The asset might be stocks, commodities, currencies, or even indices. Ownership only occurs if you keep the contract until it expires and choose delivery (which rarely happens).

2. Investment Period: Short-Term Vs Long-Term Investments In The Stock Market

  • Stock Trading: Stocks can be held for as long as you need. Both day traders and long-term investors enjoy this flexibility.
  • Future Trading: Futures contracts have fixed expiry dates, usually weekly, monthly, or quarterly. Either settle the contract or roll over before it expires. Due to this reason, future trading is more appropriately used for short-term strategies.

3. Leverage: Greater Rewards, Greater Risks

  • Stock Trading: You generally pay the full cost of the stock (or a portion if you use margin trading), but your risk is limited to your investment.
  • Future Trading: Futures contracts require only a margin deposit, often as low as 10-20% of the contract value. This means you’re controlling a large position with less upfront money, amplifying both profits and losses. It’s a double-edged sword.

It’s recommended to use a proper stock trading app to always be aware of the market fluctuations and risks included.

4. Risk Level: Which Is Safer?

  • Stocks Trading: When a stock goes down, your loss is limited to the amount you invested. You can wait out bad markets if you think the firm will recover.
  • Future Trading: Futures trading is riskier due to leverage and time constraints. Price action can lead to margin calls, where you must deposit funds or close the position, usually at a loss.

5. Market Movement: How To Profit?

  • Stock Trading: The majority of stock traders make money when stock prices go up. Short selling (betting prices will fall) is available but riskier and less frequent for beginners.
  • Future Trading: Futures allow you to make money in both rising and falling markets. You can buy if you think prices will increase or sell if you think they will decrease.

6. Purpose: Investment vs Speculation

  • Stock Trading: Stock trading can often mix investments with speculation. Most traders learn about company fundamentals and general stock market trends before buying shares.
  • Future Trading: Futures are mainly used for protecting against price fluctuations or betting on price direction. It’s more of a trading strategy than a traditional investment.

Conclusion:

Both future trading and stock trading have their roles in the stock market world. If you are planning to calculate returns, hedge business risks, or just trade for profit, then knowing these basic differences might help you decide which way to go. Use a good stock trading app to always stay ahead of the market fluctuations, trends and always be aware of the ups and downs of the stock market.