Each day, individuals around the globe pursue their financial goals via financial derivatives. According to the Financial Information Association (FIA), more than 25 billion futures and options contracts changed hands during 2017. This staggering figure illustrates the high level of public interest that has made futures and options some of the most popular modes of trade in the world.
From Tokyo to Chicago, futures trading attracts people from all walks of life. Given the many benefits of trading futures, it’s no wonder why. Although each individual’s motivations are unique, several upsides undoubtedly serve as common ground:
- Asset diversification
- Availability of leverage
- Low cost structure
Whether your interest is limiting risk or pursuing speculative opportunities, the futures markets may be an ideal destination to achieve your financial goals.
Futures are especially useful for portfolio diversification. Products based on the pricing of currencies, commodities, debt instruments, and equities can readily limit or extend your aggregate risk exposure. Here are a few popular futures contracts offered by the Chicago Mercantile Exchange (CME):
|Energies||WTI Crude Oil||CL|
|Equities Indices||E-mini S&P 500||ES|
|Debt Instruments||10-Year T-Bill||ZN|
These products are only a small sample of those available on the CME, not to mention other the Chicago Board Options Exchange (CBOE), International Commodities Exchange (ICE), and other exchanges. If your goal is to diversify holdings, then the futures markets clearly offer a variety of excellent alternatives.
One of the most attractive benefits of futures is the availability of financial leverage. Being able to control large quantities of an underlying asset is particularly advantageous, especially if you want to implement hedging strategies. For many Ag producers and money managers, the leverage provided by futures contracts is a crucial part of conducting business.
Using high levels of leverage is also essential to active speculation. When compared to traditional stock trading, opening a futures account requires only a fraction of the capital. In this way, traders can parlay small amounts of money into large profits. While it’s true that applying leverage is inherently risky, the rewards may warrant the added danger.
Another attractive attribute of the futures markets is the abundance of trading opportunities. The sheer number of contract offerings ― not to mention their diversity ― provides active traders with everything needed to employ any number of strategies. Whether you’re an intraday, day, or swing trader, there’s a target-rich environment that fits your style.
Two characteristics are the primary drivers of opportunity in the futures markets:
- Volatility: Consistent fluctuations in contract value provide traders the ability to capitalize on discrepancies in asset pricing.
- Liquidity: Robust participation is important to order flow, tight bid/ask spreads, and an efficient process of price discovery. Liquid markets are exceptionally useful in regards to having orders filled at desirable price levels.
Without adequate price action or depth-of-market, profitable trading becomes exponentially more difficult. Many futures products consistently provide a wealth of both liquidity and volatility, which makes them ideal for active trading.
Low Cost Structure
As any business owner will tell you, start-up and operational expenses can be insurmountable barriers to entry. Keeping the cost of infrastructure, maintenance, and raw materials as low as possible is the key to sustaining a livelihood in any endeavor.
For those interested in trading futures for a living, the cost structure is extremely low in comparison to other financial venues and traditional industry. Meeting the following monetary obligations is all that is required:
- Technology: Buying a computer and subscribing to a software platform to enable trading are two necessities. However, an adequate trading computer won’t break the bank, and many brokers offer fee-free platform options.
- Connectivity: Securing an internet connection and streaming market data is required. These costs vary depending upon the exchange and products being traded, as well as the locale of your internet provider.
- Fees and commissions: Exchange fees and brokerage commissions are assigned on a per contract basis. Discount and deep-discount fee and commission structures are available, typically at a fraction of the cost seen in stocks.
Do the Benefits of Futures Outweigh the Risks?
Whether the futures markets are suited to your personal situation will depend on several factors. Available time, risk capital, and financial goals are a few considerations that you must make when weighing the pros and cons of trading futures.
For more information to help you assess whether the benefits of futures fit your situation, check out a free consultation with a member of the team at Daniels Trading.