Recently, a friend asked me how to start trading stock futures. I realized that many people actually don’t understand how the margin for stock futures is calculated, and why the trading costs for futures are so much lower than for spot stocks. Today, I want to discuss this topic.

First, let’s make an intuitive comparison. Buying one lot of TSMC shares in the spot market costs about 400k TWD, with transaction fees possibly a few hundred dollars. But if you buy one futures contract of TSMC (equivalent to 2 lots of spot shares), the fee can be as low as 10-20 TWD—do the math yourself to see how big the difference is. Plus, the Taiwanese government only taxes futures trading at 0.02%, far lower than the 0.3% for spot stocks. That’s why short-term traders prefer futures.

But cheap doesn’t mean risk-free; leverage is a double-edged sword. Stock futures only require margin, roughly 5-10% of the contract value, meaning you can control a large amount of capital with a small amount of money. Sounds great, but the risk is enormous. Among people I know, many have been liquidated because they didn’t understand the margin call mechanism for stock futures.

Speaking of margin, it’s the core of futures investing. The Taiwan Futures Exchange sets different margin levels based on stock volatility. For stable large-cap stocks like TSMC, the margin requirement is lower—about 13.5% for the initial margin and 10.35% for the maintenance margin. For example, if TSMC’s stock price is 400 TWD, buying one contract requires an initial margin of 108,000 TWD. If the stock price drops below approximately 387.4 TWD, the margin will fall below the maintenance level, and the broker will ask you to top up. If you don’t add funds in time, you’ll face forced liquidation.

Therefore, controlling leverage is really crucial. Some traders start by depositing more margin, reducing leverage, and at least avoiding constant margin calls. Remember, futures are T+0 trading—markets can change rapidly. If your judgment is wrong, you might get liquidated before you can react.

Another characteristic of futures is the expiration date. Taiwan stock futures are divided into near-month and far-month contracts. Near-month contracts usually have higher trading volume, but you need to pay attention to expiration dates. If you want to hold long-term, you need to roll over before expiry, which can result in profits or losses. U.S. stock futures trade from 6:00 AM to 5:00 AM the next day Taiwan time, while Taiwan stock futures trade from 8:45-13:45 and 15:00-5:00, with a break in between.

My personal advice is that stock futures are suitable for short-term traders and active traders. But if you have large capital, liquidity can be an issue. Futures order volume and trading volume are usually lower than spot stocks, and illiquid stocks may have wide bid-ask spreads, making execution prices less ideal.

Also, not all stocks have corresponding futures contracts. Plus, the minimum price movement and trading units depend on the stock price—higher-priced stocks have larger tick sizes, which is different from spot trading. If your capital is limited, you might consider trading mini-futures, where 1 contract equals 100 shares instead of 2,000.

Finally, a key point is setting stop-loss and take-profit levels. Unlike spot stocks, where you can buy and hold without immediate risk, futures can be liquidated instantly if the market moves against you. So, it’s essential to set stop-loss and take-profit points at levels you can handle. High leverage can amplify gains, but it also magnifies losses—mistakes can lead to rapid losses.

The margin system for stock futures is actually well-designed, but only if you truly understand how it works. The low trading costs and tax advantages are attractive, but the high risk must never be overlooked. If you’re a beginner, it’s recommended to practice with a demo account first. Only after mastering entry and exit timing and risk management should you trade with real money.