Trading and making a profit is a lot of fun, but it can be confusing as well. There is a lot to learn! One of the first questions you might ask yourself is, should I trade stocks? Forex? Futures? Options? Something else? Part of finding the answer to that is just learning about each market, so you can choose what makes sense to you. So let’s discover more about stocks vs forex vs futures vs options.
More markets are available for trading today than ever in the history of the world. The markets aren’t just available, but public access to them is easier than ever before. So choosing among them is more complex than ever. Let’s bring a bit of clarity to the issue.
Here is a comparison of stocks vs forex vs futures vs options. Following the table, I’ll talk a bit about why you care about each of these features.
Stocks vs Options vs Futures vs Forex
|Definition||A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.||An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price.||A futures contract is an agreement traded on an organized exchange to buy or sell assets, especially commodities or shares, at a fixed price but to be delivered and paid for later.||Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade.|
|Examples||Any stock sold over any of several stock exchanges||Buy or Sell Puts or Calls||Index futures such as ES, NQ, YM||Pairs of currencies|
|Any publically traded company||Spreads, Straddles||Commodities such as metals, food and fiber, livestock, grains, energy||EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, USD/CAD|
|Ways to Trade||Oracle on Wilshire||Oracle on Wilshire||Coming soon||Forex Investing Live Signals|
|Commissions paid to broker||Yes||Yes, can be higher||Yes||No, in general. Instead you pay the "spread". The spread is the price difference between where a trader may purchase or sell the underlying asset.|
|Regulated||Yes. The SEC has jurisdiction over stocks and all publicly-traded companie. Stock brokers and investment firms are regulated by the Financial Industry Regulatory Authority.||Yes. The United States has two major government bodies regulating the financial markets: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Both organizations have a similar goal—to prevent fraud and other malpractice in the financial markets and to safeguard investor interests. Two nongovernmental self-regulatory industry organizations, the Financial Industry Regulatory Authority (FINRA) and National Futures Association (NFA), also help oversee the industry. All option contracts traded on stock/index as underlying are overseen by the SEC and FINRA whereas options contracts on forex/commodity/futures as underlying are overseen by the Commodity Futures Trading Commission and the National Futures Association.||Yes. The Commodity Futures Trading Commission (CFTC) has jurisdiction to regulate the futures markets with oversight over the entire industry. Each U.S. futures exchange operates as a self-regulatory organization governing its floor brokers, traders and member firms.||Not really. The foreign exchange market is by far the largest, most liquid market in the world. But despite its huge size this is a market that is far from extensively regulated and that has no single global body to police the massive 24/7 global forex market. How US Authorities Regulate Forex Brokerage Accounts: The National Futures Association (NFA) is the “premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets” (including forex).|
|Liquidity||Varies.||Options can be thinly traded, thus have low liquidity.||Varies. Some, like ES, are heavily traded, and have good liquidity. Others are very thinly traded, so have low liquidity.||Very High. Over $5 trillion traded per day.|
|Taxes||You pay long term (held over a year) or short term holding (ordinary income) taxes.||Can be quite complex. The tax treatment is tied to the tax treatment for the option's underlying financial instrument.||Futures contracts fall under the 60/40 rule, where 60% of gains are treated as long-term capital gains and 40% are treated as short-term capital gains (ordinary income) - regardless of the actual length of the holding period.||Taxed as ordinary income.|
|Dividends||If you purchase a stock sufficiently long before it distributes dividends, you receive them.||No||No||No|
|Ease of taking a short trade||Varies, but generally not as easy as going long.||Easy. Buy a put option.||Easy||Easy|
Leverage involves borrowing a certain amount of the money needed (usually from your broker) to invest in something. Leverage is used to increase the potential return of an investment.
Essentially, leverage allows you to pay less than full price for a trade, giving you the ability to enter larger positions than would be possible with your account funds alone It’s important to understand that leverage magnifies both gains and losses.
Leverage is expressed as a ratio. A 2:1 leverage, for example, means that you would be able to hold a position that is twice the value of your trading account. If you had $25,000 in your trading account with 2:1 leverage, you would be able to purchase $50,000 worth of the instrument.
For example, Forex trading offers high leverage in the sense that for a small account requirement, you can control a huge amount of money. Forex trades can be 50:1 or 100:1 leverage.
Check with your broker or the product listing to determine the leverage available for the instrument you are trading. You can read more about leverage here: http://www.investopedia.com/terms/l/leverage.asp
Commissions paid to broker
Know how much you are paying in commissions! And factor them in when planning your trading strategy. If you are taking short little scalping or day trades, your commissions can eat up all your profit. Be aware!
If you are trading Forex, you often pay no commissions, but you pay the spread, instead. The spread is the price difference between where a trader may purchase or sell the underlying asset – that is, the bid-ask spread. This can be substantial, depending on your broker, so be sure to check what it is.
Why does it matter if a trading instrument is regulated? Government regulation is meant to assure that you, the trader, are not the target of fraud, mismanagement and abuse.
One of the main benefits of regulation is a controlled environment in which you can trade without having to worry about unfair practices like insider trading and the like. Not to say it doesn’t happen anyway, but the effect is significantly less.
For example, the SEC, which regulates the stock markets, investigates alleged incidences of crimes associated with the trade of securities in the U.S., including but definitely not limited to:
- Insider trading
- Spreading false information
- Accounting fraud
- Market manipulation
- Breach of fiduciary duty
It’s nice to have someone looking out for you in these areas!
Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Cash is considered the standard for liquidity because it can most quickly and easily be converted into other assets.
Typically, the more volume there is (the more trades taking place) in a trading instrument, the higher the liquidity. If there is high liquidity, you can be more certain of buying or selling your trade at the “current” price, because there are lots of other traders wanting to buy or sell at that price, and your transaction can be executed.
If a stock, for example, is very thinly traded (there are few traders wanting to buy or sell that stock, you may have to pay more or receive less than the published price, in order to find a buyer or seller willing to complete the transaction.
Oh boy, taxes! You should know what the tax hit will be on profits you take on any trade. They do differ, and it will make a difference to your bottom line. Tax computations can be complex and at the same time boring, so it is easy to want to ignore them. However, you would be well served to read up on the instrument you want to trade.
Here are a few links to read about taxes and trading:
Stock market, and longer term trades: https://www.ally.com/investing/trading/tax-implications-of-trading/
If you are day trading or swing trading, or not trading stocks, you can skip this part, you won’t be receiving any dividends. However, if you are trading stocks, and holding for a longer time, you should be aware of the timing of dividends.
Here is a good page to read if you are planning to time your trades to take advantage of dividends: http://www.investorguide.com/article/12782/the-dividend-timing-trading-strategy-ws/
Ease of taking a short trade
Markets go up, they go down. Most traders like to take advantage, and profits, going both ways. Go long when it is going up. Go short when it is going down. Make profits.
However, if it is difficult to go short, you can’t follow this plan. So be aware of your market, and whether you can just jump in short if you want to.
So now you have a better idea of whether you should trade stocks vs forex vs futures vs options. If you educate yourself about the market you are going to trade in, then you are that much farther ahead in reaching your goal of profitable trading. Then, all your decisions will be the right ones.