In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade.  Here are the details of Step 9:

Decide if you want to Trade Stocks or Futures (you can trade Forex also, but this blog does not discuss Forex)

In this post I'll try to highlight the major features and differences between stocks and futures to help you decide.

Let's define Stocks and Futures.  Stocks are really easy to understand.  When you buy stock in a Corporation, you become a part owner of that Corp, and are therefore entitled to a share of their earnings (if any).  Futures are a little more difficult to understand.  If you buy futures,  you are actually entering into a contract, agreeing to buy some Physical commodity (like wheat, corn or gold) or a Financial Instrument (like the S&P 500 Index) at a predetermined future date and price. If you sell futures,  you are actually entering into a contract, agreeing to sell some Physical commodity or a Financial Instrument at a predetermined future date and price.

So although Stocks & Futures are completely different instruments, it practice how you trade either of them as Day Trader will be the same. Stock prices go up and down.  Futures prices go up and down.  Whichever you trade you bring the particular instrument up in a chart, and based on the chart's price action and technical indicators you make decisions to buy or sell.  If a particular chart were not labeled, it would be difficult to tell it were a stock or a future.

So your trading decisions will be the same for either Stocks or Futures, but there are certain details about each that you need to know before you can trade them.  If you're a newbie these may seem difficult at first, but I can assure this is easy stuff compared to actually making trade decisions based on technical analysis.  Let's go over some of them:

There is a legal minimum account size of  $25,000 set by Uncle Sam for stock traders living in the US.  Let me explain.  The SEC has specific rules regarding what they call a Pattern Day Trader.  Anyone who Day Trades will be labeled as a "Pattern Day Trader" very quickly (I wear the label proudly). And the SEC requires "Pattern Day Traders" to have a minimum account size of $25,000.   For whatever reason, there is no such minimum acct size for futures traders.  So your minimum acct size can be much less. 

With Stocks you trade shares, but with Futures you trade contracts.  So while a small Stock trader might trade 100 shares at a time, a small Futures trader might trade 1 or 2 contracts at a time. 

Unlike stocks, all Futures contract have an expiration date.  So if you wanted to trade Corn futures, you would have to specify Dec 2008 Corn (which expires sometime in Dec) or  Mar 2009 Corn (which expires sometime in Mar).  Corn also has contracts that expire in May June and Sept.  You will want to be aware ot the expiration of the contract you are trading and generally you will want to start trading the next available monthly contract some days prior to expiration.  Two different months of the same contract are generally available to trade at the same time, and you get to choose to trade which one you wish to trade.  Depending on the present date, one of the two contracts will have th majority of the volume, and that one is generally easier to trade.

Every Futures contract has a particular tick size and tick value that you need to be aware of.  For example, the mini-sized Dow Futures has a tick size of 1 point and tick value of $5.  So if you bought it,  for every point that it went up (or down) you make ( or lose) $5.  The Nasdaq 100 emini Futures has a tick size of 1/4 point and tick value also of $5.  So if you bought it,  for every 1/4 point that it went up (or down) you make (or lose) $5.

Suppose you want to buy 200 shares of Microsoft stock and it's currently priced at $20?  It will cost you (200 X $20) $4000.  Suppose you want to buy 1 contract  of Nasdaq 100 emini Futures and it's currently priced at $1075.  The amount you need in your acct is not determined by the current price but instead by the contract's margin.  The margin is fixed and set by your broker.  The margin will vary from broker to broker, but should be around a little under $4000.

This leads us to one of the most important differences between Stocks & Futures: LEVERAGE.  Continuing with the example above, for approximately the same $4000, you could buy 200 shares of Microsoft stock or 1 contract  of Nasdaq 100 emini Futures.  Supposing they each went up 2%, how much would you make?
IBM would go from $20 to $20.40, or .40 profit  per share.  Since you have 200 shares, total profit is $80. Nasdaq 100 emini would go from $1075 to 1096.50, an increase of 21.5 points.  Since for every 1/4 point that it goes up you make $5, you earn $430.  That's what leverage can do for you.  Just remember on if the price had gone down 2%, then you would have lost $430 on the Nasdaq 100 emini, as opposed to only $80 on IBM.  Obviously have the greater leverage of Futures magnifies both your gains and your losses.

Next let's consider shorting.  If you think the price of the instrument you're trading is gonna go down, you enter the trade short (sell).  If you're trading Futures, shorting is no different than go entering a trade long (buying).  When you short a stock, you are actually borrowing or renting the shares from you broker, so there may be some additional considerations.  Also certain Stocks may not be shortable at certain times.  In general shorting is just more straightforward with Futures than with Stocks.

Lastly, let's consider taxes.  The simple fact is, Day Traders will pay less taxes on Futures profits than on Stock profits.  That's because Futures profits are treated as 60% long term cap gains, 40% short term cap gains. Stock profits (assuming you hold less than 1 year) are treated as 100% short term cap gains. The short term capital gains rate is up to 35%,  but  the long term capital gains rate is only of 15%.  Assuming you pay the maximum short term capital gains rate of 35% (ordinary rate), you will pay 35% tax on your stock profits, but only 23% tax on futures profits.  I know many of you will feel bad paying less taxes, given how wisely Uncle Sam spends those tax dollars.   But a nice beach vacation might help you get over it. 

Ultimatelty, as a Day Trader it's most important to trade an instrument that "moves well" and has good liquidity.  Whether it's a Stock or a Future.  By "moves well" I mean it has a good amount of price fluctuation and prices that tend to trend.  If prices hardly change or they just seem to be all over the place, it tuff to trade (I'm a TuffTrader, but I don't like it that tuff).  Good liquidity means you can enter & exit the instrument quickly with a minimum of Slippage.   

Still not sure what to trade?  I just told you!  Look for instruments that "moves well" and have good liquidity.  Study their charts to get an idea of their "personality".  On the Futures side, the eminis fit the bill.  Check 'em out on www.cme.com and www.cbot.com.  On the Stocks side, newbies should look for actively traded Nasdaq stocks.