Why Trade Futures?
As an investor, trading futures allows you to access a larger value of stocks or commodities than if you were to buy the original stocks or commodities. This means that your profits can increase significantly if the market moves in your favor, potentially up to 10 times the margin requirement.
Futures Are Highly Leveraged Investments
Investors trading futures must provide a margin, typically 10% of the contract value, as collateral with their broker or exchange. If losses are incurred, the investor may need to pay more to maintain the margin level.
Future Markets Are Very Liquid
Futures are highly liquid due to the large number of daily trades, which ensures quick order placement and stable prices. Many futures markets also offer extended trading hours, such as stock index futures which often trade around the clock.
Commissions and Execution Costs Are Low
Commissions on future trades are very low and are charged when the position is closed. The total brokerage or commission is usually as low as 0.5% of the contract value
Speculators Can Make Fast Money
If you have good judgment as an investor, you can make quick profits through futures trading. This is because you have the potential to trade with 10 times as much exposure as with normal stocks. Another advantage of future markets is that prices tend to move faster than in cash or spot markets.
Futures Are Great for Diversification or Hedging
Futures are essential for managing risks in foreign trade. They help to reduce unforeseen costs and increase market efficiency. Companies use futures to manage foreign exchange, interest rate, and price risks. Going long in S&P 500 futures is more efficient than buying every stock in the index.
Future Markets Are More Efficient and Fair
Insider trading is difficult in futures markets because it's hard to predict actions like the Federal Reserve's policies. Unlike individual stocks, futures markets deal with aggregates that discourage insider trading. This makes futures markets more efficient and fair for investors.
Futures Contracts Are Basically Only Paper Investments
Futures trading is usually a paper transaction for speculative profit. It's less cumbersome than holding individual stocks because it doesn't require record keeping for dividends or shareholder votes.
Short Selling Is Easier
Selling a futures contract allows for short exposure on a stock, but short selling stocks can be restricted in certain markets. To sell short, a margin account with a broker is needed, and borrowing shares can be difficult and costly if the stock is hard to borrow.