How to decide between trading stocks and futures

Investments can be highly risky process if you are indecisive as there are countless methods and ways to put your money into. In Malaysia, you can choose to invest in stocks or futures under Bursa Malaysia in which both bring about good profits but if you are not careful with your funds, you might suffer huge losses as well. As there are so many options available, what then would be better for you? Stocks or futures?

Typically, both stocks and futures exist in a volatile market which means that they offer almost a similar type of risks. The process to invest is very similar where they both use brokerages, formal exchanges and bourses as well as impose charges, commissions and fees. Trading of stocks and futures require at least a buyer and seller where that would be as far as the similarities go.

Perhaps the biggest difference between stocks and futures is in the ownership factor. Where this is concerned, when you buy stocks, you are actually taking a shareholder’s place in the company where depending on the amount of shares you hold, you actually has a say and claim the earnings where you will also be entitled to bonuses and dividends too. A futures contract would not accord you with such incentives but what you are buying and selling is actually an asset where this involves the likes of commodities, indexes and currency.

An advantage of futures as compared to stocks is that you do not need too much funds to start. When you invest in stocks, you must pay the full value of the stock which, depending on the price. This is usually calculated in one lot which in Malaysia is usually consisting of 1,000 shares. On the other hand, futures trading involves margin trading where you are actually trading a fraction of the full contract value and this encircles around the 5% to 10% of the total value.

In Bursa Malaysia, if you are trading futures, you need to adhere to the 15 months expiry date in which depending on which commodities’ futures you are trading, you have up to a maximum of 15 months to sell them off. On the contrary, stocks have no such date where you can keep the stocks for as long as the company is active.

Another downside about futures is that because you are involve in margin trading, if you incur losses, it could be more than what you invested initially no matter what the contract value initially was. This means that you might not be able to control your losses which could be quite high if you do not sell quickly. Meanwhile, investing stocks do have a limit to your losses although it can be quite high if you hold many units. In stocks investments, your losses are limited to the initial capital you injected where you can avoid going into the negative value territory unless the company goes bust.

Hence, it depends largely on the risk factor and if you are more a quick selling investor because if you are in for the long term, then stocks would be ideal while if you are more on the quick selling method, then futures might just be the best investment engine for you.

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