Futures vs. Share Dealing

The case for futures on shares as opposed to regular, buy-low-sell-high share dealing is a widely spoken mantra amongst professional traders, and there are countless trading millionaires who made their wealth off the back of leveraged share trading.  While share dealing is the backbone of investing, and one of the most popular choices for consumer investors looking to generate a better return on their savings, futures trading has a number of key advantages to bring to the table over share dealing that make it a favourite amongst more serious, professional trading types.

Firstly, and most importantly, the role of leverage in making a transaction profitable should not be underestimated. A leverage ratio of even 10:1 can amplify any slight gains by a considerable portion, and often low margin percentages couple up with the inherent gearing function of futures contracts to provide tightly leveraged, hefty transaction sizes on which even small movements can realise significant gains.

Likewise, the ability to lock in future prices through futures contracts for less makes them attractive instruments for both speculators and those with a need for raw materials and commodities.  As opposed to share dealing, where traders are acquiring an asset (i.e. shares) now at today’s prices, futures allow the acquisition of assets, or rather the obligation to acquire assets, at today’s prices at some future point – thus locking in a price in the hope of a future rise in value, before actually making the acquisition.

With share dealing, the acquisition happens in the here and now, and is not naturally leveraged in the way it is constructed.  This, of course, mitigates much of the risks presented by leveraged trading, insofar as small share price movements won’t usually have a devastating impact on trading capital.  Additionally, the trader also acquires the correlative rights with being a shareholder, including the ability to vote on strategic company decisions and the all-important dividend entitlement, presenting a yield above simple price speculation. While there is no lock-in component, traders can still forecast long-term price growth – just without the intermediary step of the futures contract.

Of course, the big advantage of share dealing over futures trading is the lack of a threat from leverage gone wrong.  While a few positive price ticks can deliver wild returns on a leveraged futures position, jut a few negative ticks can wipe out your trading account.  Essentially, this means that futures are a higher risk to traders than a share transaction, although the potential rewards are significantly higher on those transactions that do work out well.

There are also factors of ownership to be considered when weighing up the advantages and disadvantages of both forms of trading, namely in the field of tax liability.  Shares attract stamp duty, payable on their sale, while futures are free from stamp duty entirely.  This might mean that futures present a better value for money transaction if you are speculating on price and intend to sell your futures contract at some point between the date of purchase and the date of expiry, but if you are hunting for yield from your assets this won’t be achieved unless you own the shares outright.

Futures on shares and share dealing directly present in themselves a number of different benefits and drawbacks, and it is up to you to determine whether you want to sacrifice leverage for low risk, or whether you want to push on with a high risk/high reward strategy.  Either way, futures contracts on shares present a viable alternative to pound-for-pound share dealing.

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