Quick Answer
A security is ownership (stock) or a creditor claim (bond) that may pay dividends or interest. A futures contract is neither: it is an obligation to buy or sell a commodity at a set price on a future date, binding on both buyer and seller. Selling stock transfers title; offsetting a futures position cancels the obligation through the clearinghouse.
The cleanest way to understand a futures contract is to line it up against a security a candidate already knows.
What Each Instrument Represents
Start with what the holder actually owns.
- A security is an ownership or creditor interest in an entity:
- Equity securities (stock) represent ownership of a company. A shareholder may receive dividends and holds a residual claim on the company's assets.
- Debt securities (bonds) represent a creditor claim. The issuer owes the holder repayment of principal plus interest.
- A futures contract is not ownership of anything. It is a binding agreement to buy or sell the underlying commodity at a set price on a future date.
Because the futures holder owns no asset yet (only a contractual obligation), a futures position pays no dividends and accrues no interest.
Exam Tip: Gotchas
- A long futures position is not ownership of the commodity. It gives no dividends, no interest, and no voting rights. Treating a futures contract like a stock you "own" is the classic trap.
- A futures contract is an obligation, and it obligates both sides. If a question describes an instrument where the seller is equally on the hook to perform, it is describing futures, not a security.
Rights
Ownership creates rights; a bare obligation does not.
- A security holder has ownership-based rights that last as long as the security is held:
- For stock: voting rights, the right to receive declared dividends, and a claim on assets in a liquidation.
- For bonds: the contractual right to interest and repayment of principal.
- A futures holder has no ownership rights in the underlying commodity while the position is open. The only "right" attached is the contractual position itself (long or short), which can be closed at any time before delivery.
A useful contrast is with options (tested separately on this exam): an option buyer holds a right without an obligation. A futures position is different from both a security and an option, because it carries a firm obligation on both sides.
Obligations
This is the single most important distinction on the exam.
- A security carries no delivery obligation for the holder. Buying stock does not obligate you to do anything later; you own it and may hold or sell whenever you choose.
- A futures contract is a binding obligation on both the buyer and the seller:
- The long (buyer) is obligated to take delivery of, or pay for, the commodity.
- The short (seller) is obligated to make delivery of the commodity.
- This mutual obligation lasts unless the position is offset (closed by an equal and opposite trade) before delivery.
Think of it this way: a stockholder who wants out simply sells and walks away, with no further duty to anyone. A futures trader cannot just walk away. Either offset the position with an equal and opposite trade, or fulfill the delivery obligation. There is no third door.
Exam Tip: Gotchas
- A stockholder can exit by selling; a futures trader must offset or perform delivery. The two-sided, firm obligation is what separates a futures contract from a security.
- Both the long and the short are obligated. The long must take delivery, the short must make delivery, unless each offsets first.
Transfer of Ownership
The word "sell" means two different things depending on the instrument.
- Securities: selling a security transfers title to an asset the seller actually owns. Ownership of the shares or the bond passes from seller to buyer.
- Futures: an open futures position does not convey ownership of the underlying commodity. Ownership of the underlying changes hands only if and when delivery occurs, and the large majority of futures positions are never delivered.
A futures position is closed by offset: the holder enters an equal and opposite trade in the same contract, which neutralizes the position through the clearinghouse. Nothing is handed over. Because standardized contracts are fungible, any long can be closed against any short through the clearinghouse without involving the original counterparty.
Exam Tip: Gotchas
- Selling stock transfers title; "selling" (offsetting) a futures contract just cancels the obligation through the clearinghouse. No commodity changes hands when you offset.
- Ownership of the underlying commodity transfers only on physical delivery, which most positions never reach because they are offset first.
Futures and Securities Comparison
This table pulls the four distinctions together.
| Feature | Futures Contract | Security (Stock / Bond) |
|---|---|---|
| What it is | A binding agreement to buy or sell a commodity at a set price on a future date | Ownership (stock) or a creditor claim (bond) in an entity |
| Rights | The contractual position only (long or short); no ownership rights in the underlying while open | Ownership-based rights: voting and dividends (stock); interest and principal repayment (bond) |
| Obligations | Firm obligation on both buyer and seller (take delivery / make delivery) unless offset first | No delivery obligation; holder may hold or sell at will |
| Ownership of the underlying | None until (and unless) delivery occurs | Holder owns the asset outright |
| Transfer of ownership | Position is neutralized by an offsetting trade through the clearinghouse; title to the underlying moves only on delivery | Sale transfers title to the asset from seller to buyer |
| Income while held | None (no dividends, no interest) | Dividends (stock) or interest (bond) may be paid |
Memory Aid: A security is something you store (you own it, it can pay you). A futures contract is something you must fulfill (both sides owe performance, or they offset).