Benefits of Futures Trading
Futures trading offers a good opportunity for other people to invest in. trading in futures contracts offers people the unique opportunity to invest in something other than stocks. Although sometimes they also operate in the same manner, futures trading presents a different method of earning revenues for the amount invested on it.
There are certain advantages that futures trading offers to interested investors. One of them is that such instruments are considered highly leveraged investments. In order for an investor to own a futures contract, he only needs to invest a small fraction of the value of the contract. Most investors only invest about ten percent of the contract’s value in exchange for trading them. This way, investors may be able to trade larger amounts of commodities than if he ever bought the commodities outright.
If he predicted the movement of the prices of the commodities traded correctly, the investor has a great chance of profiting ten-fold for an initial investment of ten percent of the actual futures contract’s value. That is how leverage works to the advantage of the investor in futures trading. The investor must also be aware that the leveraged position could work drastically against him, if his predicament on the market is wrong, and the market moves against him he could sustain unlimited loses.
Another advantage of futures trading is that it is basically a paper investment. Although futures trading involves certain commodities, the investor doesn’t have to worry about how to take care of the produce himself. Trading is done with the futures contract changing hands instead of the commodity itself. This makes it quite convenient since the investor doesn’t have to worry about where to store and keep the commodities being traded for the meantime Just beware that it is your responsibility to make sure your contract or position is closed or you may end up receiving the actual commodity if LONG the contract, or asked to deliver the actual commodity if SHORT the contract.
Another advantage of futures trading is that futures trading is that the futures contracts being traded are considered very liquid. This means that there are huge amounts of contracts being traded in the market on a daily basis. Orders can be placed quickly and they can be bought or sold in a similar fashion. The market has a number of participating buyers and sellers.
One good thing about the futures trading market is that it enjoys fairer trading as compared with stock and share trading. Trading in the futures exchange can be very vocal as trading is done in the midst of shouting of “Buy!” or “Sell!” Another thing is that it is more difficult to get insider information in futures trading that seems to be a big problem in the price manipulation in stock trading.
Commissions on futures markets tend to be smaller as compared to other trading markets. The commissions are usually paid after the position has ended. Depending on the level of service, the commissions for brokers can be as low as five dollars to as high as two hundred per transaction.
For an investor, it may be quicker to make money on futures trading. Aside from the leverage provided by futures, the markets tend to move more quickly as compared to cash markets. But this can also work against the investor since the quick pace of the market can also lead to quick losses for the investor for incorrect predictions on their positions.
There is a substantial high and unlimited level of risk of loss in trading commodity futures, options, options writing and off-exchange foreign currency products; such trading is not suitable for all investors. Past performance is not indicative of future results.