Margin Trading Vs. Futures Trading: Similarities and Differences

What is Margin Trading?

Margin trading involves borrowing funds from a crypto exchange or a brokerage platform to make an investment. When investors have small amounts of capital, but they would like to open big trading positions with the anticipation of making profits, they take a loan from the trading platform and invest in their preferred assets.

We can say that margin trading is more like gambling at a casino. Even though it is not actually gambling, the margin trading process is similar to it. Because, similar to gambling, there is a possibility of making high profits with small investments. But, there is also the danger of losing everything.

Before taking a loan from crypto margin trading platforms, investors must deposit some funds as collateral. Once they gain initially expected profits on their trading positions, they can return the loan amount to the trading platform. Since these are speculative trades, there is also a high risk of losing the funds if the trading position didn’t perform as initially forecasted.

What is Futures Trading?

Futures trading involves buying or selling an asset at a predetermined future price and date. This type of trading involves derivative assets and is carried out on futures exchanges. Futures contracts are agreements between buyers and sellers to execute a transaction between them when the underlying asset reaches a predefined price on a predefined date.

We can compare futures trading with betting on a horse race. Similar to how you bet on a particular horse that could win the race, traders bet on a crypto asset estimating it would reach a predefined price on the date defined in the contract. And, like horse race bests, futures contracts also have expiration dates.

Futures also take advantage of leverage, allowing investors to buy a large quantity of a particular asset by paying less amount. With a small amount of funds, investors can get exposure to large value transactions. With advanced technical tools like crypto futures trading bots, this process is made automatic and more efficient than traditional processes.

Margin Trading Vs. Futures Trading: Similarities

Leverage

As we discussed, both margin trading and futures trading operate on the concept of leverage. Investors can enter a large trading position with small amounts of initial investments. This is possible with loans from trading platforms.

Risk

Both margin and futures trading are highly risky trading methods, as they can enhance both profits as well as losses. Even though the initial amount is smaller, they can lose a significant amount of funds if the asset price moves against their forecast.

Speculation

Both margin trading and futures trading methods are speculative in nature. Investors speculate on asset prices and make a bet expecting the price reaches a certain data point. Historical market performance and price data is taken into account in these cases.

Contractual agreements

Traders and broker platforms have contractual agreements between them in both margin trading and futures trading. These agreements outline various details of the trade such as margin requirement, price of the asset, expiration date in futures contracts, etc.

Margin Trading Vs. Futures Trading: 5 Key Differences

• Types of assets: While margin trading is used to trade assets like stocks, ETFs, and other spot market assets, futures trading is used for a wide range of assets including commodities, indexes, derivatives, bonds, etc.
• Types of Investors: Margin trading method is usually followed by short-term investors. On the other hand, futures trading is more suitable for long-term investors.
• Leverage: While margin trading involves a leverage between 5% to 20%, in futures trading it can be a whopping 100%. Thus, futures trading offers more leverage with a possibility and risk of gaining or losing significantly.
• Collateral: In the case of margin trading, trading platforms give loans based on the collateral deposited. Whereas, futures trading requires a good-faith deposit to carry out the trade.
• Duration: Margin trading has no expiration date, traders can hold their trading positions as long as they prefer. But as we discussed earlier, futures trading involves predefined expiration dates.