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- A stock is a share of ownership in a company, with no end date. A futures contract is an agreement to buy or sell an asset at a set price on a set date, and the holder owns no part of that asset.
- The two differ in many ways, and this article covers six that matter to an investor, including ownership, expiration, leverage and margin, capital required, income, and liquidity and trading hours.
- Both are available in the UAE. The Dubai Financial Market (DFM) lists shares in many companies and single-stock futures on 16 of them, so the difference sits in the instrument, not the venue.
Two of the most common ways investors and traders gain stock market exposure are buying shares and trading futures.
A share is a slice of ownership in a company. A futures contract is an agreement to buy or sell something at a set price on a set future date.
Both can give exposure to the same company, but what each gives the holder is very different.
What Stocks and Futures Actually Are
A share signifies an ownership position in a corporation, along with a claim on its proportional share of the company’s assets and profits. ⁽²⁾
In the UAE, shares are bought and sold on the Dubai Financial Market and Abu Dhabi Securities Exchange.
A futures contract is an agreement to buy or sell a specific quantity of a commodity or financial instrument at a set price on a particular date in the future. ⁽²⁾
The underlying asset can be a commodity such as crude oil, a stock index, or the shares of a single company.
Ownership
A shareholder owns part of a business. That stake typically comes with voting rights on certain company matters. ⁽²⁾
A futures holder owns nothing of the kind. The contract is a legally binding agreement tied to a price, and it commits both the buyer and the seller.
An E-mini S&P 500 contract, a stock index future traded on CME Group, settles in cash to the value of the index, so no shares ever change hands.
A WTI crude oil contract, also traded on CME Group, works differently. It covers 1,000 barrels and is delivered physically at Cushing, Oklahoma. ⁽³⁾
Expiration
A share has no end date. An investor can hold it for a week or a decade, and the position stays open until they choose to sell.
A futures contract does have an end date. E-mini S&P 500 contracts expire quarterly, on the third Friday of March, June, September and December. ⁽³⁾
WTI contracts expire every month. ⁽³⁾
DFM single stock futures run in 1, 2 and 3-month series, with the last trading day on the third Thursday of the expiry month. ⁽¹⁾
Staying exposed beyond that date means opening a new contract in the next series.
Leverage and Margin
Buying a share outright means paying its full price. Futures work differently.
A futures trader deposits margin instead. CME says this is not a down payment, and the trader does not own the underlying asset. ⁽³⁾
CME puts typical futures margin at 3% to 12% of a contract’s value. ⁽³⁾ On DFM single stock futures, initial margin runs between 10% and 30%. ⁽¹⁾
At roughly 5% initial margin, an E-mini S&P 500 contract gives more than 20 times leverage. ⁽³⁾
Leverage works in both directions. A small move in the price changes the trader’s account by a much larger percentage, up or down.
Futures are also marked to market every day, so gains and losses move in and out of the account daily. ⁽⁴⁾
If account equity falls below the maintenance level, the broker issues a margin call. A trader who cannot meet it can be liquidated. ⁽⁴⁾
A futures trader can lose more than the initial deposit. ⁽⁵⁾ A shareholder who paid in full cannot lose more than the amount invested.
Shares can be bought with borrowed money too, and margin calls apply there as well. The difference is that in futures, margin is built into how the contract works.
Capital Required
A share costs its listed price. The capital needed is that price multiplied by the number of shares.
A futures contract asks for less upfront, but it covers more. A DFM single stock future covers 100 shares. ⁽¹⁾ A WTI contract covers 1,000 barrels. ⁽³⁾
Take a hypothetical share priced at AED 10. Owning 100 shares costs AED 1,000.
A futures contract on 100 shares carries the same AED 1,000 of exposure. At the 10% to 30% margin range, the deposit would be AED 100 to AED 300. ⁽¹⁾
The smaller deposit does not mean a smaller position. The exposure is identical, and so is the profit or loss from a price move.
Income
Many UAE-listed companies pay dividends to their shareholders.
A futures holder is not entitled to the dividends a company pays. ⁽⁵⁾ Expected dividends are instead built into the futures price, which is worked out from the price of the underlying asset, interest rates, and the dividends expected before the contract expires. ⁽³⁾
The return on a share can combine price movement and dividends. The return on a future comes only from the change in the contract’s price.
Liquidity and Trading Hours
Shares on the DFM settle on a T+2 cycle, meaning two business days after the trade. ⁽¹⁾
DFM single stock futures are cash-settled daily and again at expiry. ⁽¹⁾
How easily a share or a futures position can be exited depends on how actively that specific share or contract trades. A thinly traded contract can be harder to exit at the price an investor expects.
Trading hours are almost identical on the DFM. Shares trade Monday to Friday from 10:00 am, with the closing auction running from 2:45 pm to 3:00 pm. ⁽⁶⁾
DFM single stock futures trade Monday to Friday, from 10:00 am to 3:00 pm. ⁽¹⁾
Two Instruments, Two Different Jobs
None of these six factors makes one instrument better than the other in general.
Shares give ownership, a claim on dividends, and no expiry date. Futures give exposure to a price for a fixed period, with a smaller upfront deposit and daily settlement of gains and losses.
They are different tools, suited to different amounts of capital, different time horizons, and different tolerances for daily swings in an account.
Futures trading carries a high risk of loss, and losses can exceed the initial deposit.
