It always amazes me how people do not understand the financial implications of their trading activities. It is hard enough to be profitable, let alone having to deal with the IRS and trading expenses. Knowing the various issues involved can help you to make significant differences in your bottom line.

Many people trade in and out of the market, not realizing the implications of trading expenses. One such expense is commission. Commissions are quite different on stocks and futures ( Yes, many people say futures are risky, but that is not because of futures, it is because of the people who trade them and how they do it).

An Emini S&P contract, which is traded on the Chicago Mercantile Exchange out of Chicago, represents $50 times the index in value of the S&P 500 index. If the index is trading at 1300 then, it is $65,000 worth of stock. A small account can trade in and out of this market for only about $2.40 per side all expenses included ("all in"). On the flip side, you can trade the Spyders, symbol SPY. SPY is an Exchange Traded Fund or "ETF." ETFs are a fast growing market place and are attracting huge amounts of capital, as are the Emini S&Ps. SPY would trade at or about $130 per share when the S&Ps were trading at 1300, so an equivalent purchase would be 500 shares ($500 * $130 = $65,000). At a decent broker, you could trade that at around a penny a share, or $5.00 per side, almost twice as much as the Emini contracts. Then there is the topic of slippage because you always pay the ask to buy and the bid to sell.

This is another hidden expense that, if you are trading frequently, will add up to a lot in time. On the SPY this "spread" is typically a penny. At $130, this is another $5.00 per side, making a total of $10 per side on the SPY to get in. For lower priced stocks, such as the Nasdaq ETF (QQQQ) the expense is substantially more on a percentage basis, becasue it trades at a much lower price (therefore you are trading more shares). Most ETFs are lower priced that the SPY, making the SPY an excellent choice as a stock market based trading vehicle.

On the Emini S&Ps the minimum tick and expected slippage for a small account is $12.50. Add the commission to that of $2.40 and you are at around $15.00 each side. Substantially more than the SPY, but less than many other ETFs on the stock market side.

Then comes the taxation portion of the equation. Of course you will want to check with your accountant on this, but stocks, or ETFs are taxed as short term capital gains. Futures are taxed a partially long term capital gains (60%) and partially short term (40%). As a result, the tax benefits of using futures as an investment vehicle for actively traded taxable accounts can be substantial.

One other factor influences my personal decision to trade futures over ETFs on my stock index trading and that is the nightmare of dealing with stock brokerage statements and my accountant. If you trade actively, you will pay your accountant a lot to sort through all crazy ways your stock brokerage puts together statements making it difficult to reconstruct what hapened for accounting. To make it worse, when you call the brokerage for assistance, they can't seem to tell you what the statements mean either (I speak from experience- try it for yourself).

Deciding which vehicles to trade when you are an active trader can be a very important decision, hopefully this will help you as a guide to structure your trading activities to best benefit. My choice stands with futures.