Why do futures allow higher leverage?

External question — Personal Finance Stack Exchange Author: Joe C. Original post: https://money.stackexchange.com/questions/161506 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Why do futures allow higher leverage? Shouldn't the risk of a futures contract be the same as the spot. In that case, why would brokers feel more comfortable handing leverage to futures traders vs spot traders?

External answer — Personal Finance Stack Exchange Author: D Stanley Original post: https://money.stackexchange.com/a/161519 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Return is generally measured based on the amount initially invested. If you buy a barrel of oil for $80 and sell it for $100, you earn a 25% return ($20 profit / $80 invested). With a futures contract, you don't initially pay anything . You enter into a contract to buy/sell something at an agreed upon price and date (and location for physically settled futures). So if you "bought" a future to buy a barrel of oil at $80, you would pay nothing upfront. If the price of oil went to $100, you could buy the barrel at $80, sell it for $100, and make $20 profit with no initial investment so your relative return is infinite ( 20/0 ). In reality, brokers require some margin to be placed to ensure that you can afford any losses, but that is generally a portion of the futures value, so there is some initial cash outlay, and return is not infinite, but is it several times higher than it would be without buying the oil upfront and waiting to sell it. Also in reality, most commodity futures are settled before expiry, so one would instead sell the future for $100, collecting the $20 profit without having to pay anything other than margin . So futures allow leverage by allowing you to invest more with the same initial outlay, or, they multiply relative returns by reducing the amount of initial investment, depending on how you want to look at it.