Futures trading offers a good opportunity for a different type of investment. Trading in futures contracts offers people the unique opportunity to invest in something other than stocks. Although, on the surface, it may seem similar to the stock market, futures trading presents a completely different method of earning revenues.
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 3-12 percent of the contract’s total value in exchange for control of that contract. This way, investors may be able to trade larger amounts of commodities than if they 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.
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.
The thing to remember is this: in “Futures Trading” we are speculating on the price of a certain commodity in the future. We are buying a contract today with the expectation of delivery on a certain date… at that date’s price. So, if we buy a July Corn contract in April at X dollars per bushel, that contract will reach it’s “delivery date” in July and delivery will be made at the July price. If we’ve figured correctly, and the price we paid for the contract is lower than the actual price in July… we’ve made a profit.
One thing to note: no one holds a futures contract until the delivery date. They are traded and exchanged before that, based on their value of the day. No one wants 500 bushels of corn delivered to their front door. The contracts are handled through clearing houses, and in the end, they end up in the hands of actual commodity buyers and sellers. In the meantime, they provide hedging and liquidity in the markets.
Another advantage of 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 similarly. There are always quite a number of available buyers and sellers for futures contracts, whatever commodity it might be.
One good thing about the futures trading market is that it enjoys more fair 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 than compared to other trading markets. The commissions are usually paid after each transaction has been placed, and most traders these days place their own trades online. This has reduced commissions greatly, and most brokers earn the greater portion of their earnings through advice they provide.
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.