So you are interested in futures trading, first of all… what is a futures market?
Futures contracts are standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a regulated commodity futures exchange. Here are some examples of futures contracts:
- Agriculture: Corn, wheat, soybeans and livestock
- Interest rate: Projections of bonds and notes traded over different time frames, such as 5, 10, and 30
- Energy: crude oil and natural gas
- Metals: gold, silver and other precious metals
- Stock index: S&P 500, DOW Jones Industrial Average and NASDAQ
- Spot Currency: euro, US dollar and other major currencies
This diverse combination of trading instruments provides opportunities to trade in virtually any market condition.
Now that we’ve established the root of a futures contract, here are some unique advantages of futures trading over other markets like stocks or forex.
1 . Leverage
Leverage in futures contracts is created using performance bonds, commonly referred to as margin, which is the amount of money deposited by both the buyer and seller of a futures contract. to ensure compliance with the terms of the contract. The performance bond may be only a fraction of the total contract value, often 3-12%, making futures contracts a highly leveraged trading vehicle. This means that futures contracts represent significant contract value that can be controlled with relatively little capital, giving the trader greater flexibility in capital efficiency. Conversely, higher leverage also creates more potential risk, this leverage/risk ratio should be well understood before trading futures contracts.
of them . Liquidity
Most futures markets are very liquid. By providing electronic access to a wide range of products in a centralized arena, markets attract a wide range of participants who trade millions of contracts daily. This volume allows traders to easily and efficiently execute trades of virtually any size without substantial price change.
3 . Lowest minimum account balance
The SEC pattern day trader rules state that a pattern day trader must fund an account with $25,000 and maintain it as a minimum balance. Since futures trading does not include a pattern day trading rule, the cost of funding an account is noticeably less . Either way, only venture capital should be used to trade, regardless of the financial instruments being traded.
Four. Regulation and transparency
Futures markets are regulated by the United States Commodity Futures Trading Commission (CFTC), which is an independent government agency created to foster open, competitive and ultimately healthy futures markets. In addition, the CFTC protects market participants and the public from fraud, manipulation, or abusive practices.
The National Futures Association (NFA) is a self-regulatory body for the US derivatives industry that includes futures contracts. The NFA has developed and enforced rules and provided services that help protect investors in the marketplace for over 30 years.
Since futures markets are regulated, financial statements are provided and all client funds are held in segregated accounts.
In addition, futures contracts are traded on a centralized market where all prices are known to everyone. Trade is open, fair and anonymous. Comprehensive price and trade data is distributed in real time, giving users a clear view of every trade.
5 . Fiscal advantages
Futures trading may also offer specific tax advantages over other instruments such as stocks. Discussing these potential benefits with your tax advisor can help you understand if there are any tax benefits for you.
To explore the key concepts of futures trading, such as long or short positions, point-vs.-tick values, and trade management, watch the quick video below:
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