Trading futures contracts have several advantages over other investments:
1. Futures are highly leveraged investments. To own a futures contract an investor only has to put up a small fraction of the value of the contract (sometimes as little as 2-3%) as margin. In other words, the investor can trade a much larger amount of the commodity than if he bought it outright, so if he has predicted the market movement correctly, his profits will be multiplied compared to the amount deposited as margin. This is an excellent return compared to buying a physical commodity like gold bars, coins or mining stocks.
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The margin required to hold a futures contract is not a down payment but a form of security bond. If the market goes against the trader’s position, he may lose some, all, or possibly more than the margin he has put up. But if the market goes with the trader’s position, he makes a profit and he gets his margin back.
For example, say you believe gold in undervalued and you think prices will rise. You have $3000 to invest – enough to purchase:
10 ounces of gold (at $300/ounce), or 100 shares in a mining company (priced at $30 each), or enough margin to cover 2 futures contracts. (Each Gold futures contract holds 100 ounces of gold, which is effectively what you ‘own’ and are speculating with. One-hundred ounces multiplied by three-hundred dollars equals a value of $30,000 per contract. You have enough to cover two contracts and therefore speculate with $60,000 of gold!)
Two months later, gold has rocketed 20%. Your 10 ounces of gold and your company shares would now be worth $3600 – a $600 profit; 20% of $3000. But your futures contracts are now worth a staggering $72,000 – 20% up on $60,000.
Instead of $600 profit, you’ve made a $12,000 profit!
2. Speculating with futures contracts is a position investment. You dont have to literally store three tons of gold in your garden shed, 15,000 litres of orange juice in your driveway, or have 500 live hogs running around your back garden!
The actual commodity being traded in the contract is only exchanged on the rare occasions when delivery of the contract takes place (i.e. between producers and dealers). In the case of a speculator (such as yourself), a futures trade is purely a paper transaction and the term ‘contract’ is only used because of the expiration date being similar to a contract.
3. An investor can make money more quickly on a futures trade. Firstly, because he is trading with around ten-times as much of the commodity secured with his margin, and secondly, because futures markets tend to move more quickly than cash markets. Similarly, an investor can lose money more quickly if his judgment is incorrect, although losses can be minimised with Stop-Loss Orders. Our trading method uses stop-loss orders to protect capital and lock in profits and thus makes the method robust and dynamic.
4. Futures markets are usually fairer than other markets (like stocks and shares). These markets are regulated by independent authorities in every country in the world. The transactions are transparent and trading activity is reported daily. Transactions are placed through a Clearing House and finally all trades are guaranteed by the Exchanges. This means that there will always be a seller for every buyer and a buyer for every seller.
5. Most futures markets are very liquid, i.e. there are large volumes of contracts traded every day. This ensures that market orders can be placed very quickly as there are always buyers and sellers of a commodity. For this reason, it is unusual for prices to suddenly jump to a completely different level, especially on the nearby contracts (those which will expire in the next few weeks or months).
6. Commission charges are small compared to other investments.
Futures contracts offer traders simplicity, flexibility and cost savings. There are no costs attached to the leverage received and transaction fees are small which means futures are head and shoulders above all other leverage products. Futures are the second most liquid markets in the world which means that orders are filled immediately and at the desired price.
All in all, futures are the perfect traders market.
By: Andrew Baxter
About the Author:
Andrew Baxter is one of Australia’s most highly regarded trading and investment educators. Andrew is also a co-founder and facilitator of the Elite Traders Group, Options Trading Mastery and various other educational programs aimed at leveling the playing field between professional and private traders.
For More Information About Andrew’s Free Educational Webinars and Resources, please visit the Elite Traders Group Website: http://www.EliteTradersWebinars.com.au
