The world’s capital markets are diverse arenas, filled with risks and opportunity. If you’re going to pursue your financial goals within their confines, then choosing the right trading venue is imperative.
Fortunately, with a little due diligence, you can easily accomplish this task. Before you open an investment, stock, or forex trading account, take a few minutes to examine the advantages of futures trading. Doing this, you may discover that futures could bring the most value to your enterprise.
Capital Efficiency
Futures contracts are financial derivatives products. Accordingly, their value is based on a quantity of an underlying asset at some forthcoming point in time. One of the largest advantages of futures trading is that participants trade contracts using high degrees of leverage.
Although a contract’s notional value may be immense, it is readily tradable thanks to margin. Margin is a good faith deposit made by the trader that facilitates market activities. In futures, exchange-set margin requirements range from 3-12 percent, a far cry from the 50 percent required with traditional equities. This means that anyone with an account balance of only a few thousand dollars has the ability to leverage the stake into much larger returns. When it comes to capital efficiency, futures give participants “the most bang for their buck.”
Short-Selling
“Short-selling,” or simply “shorting,” is the act of selling a security in order to profit from a downturn in pricing. The practice has countless strategic applications and can be a great way to prosper during challenging financial times. In contrast to many other securities, futures products may be shorted without restriction.
For the vast majority of financial instruments, short-selling is heavily controlled. In stocks, the U.S. Securities and Exchange Commission (SEC) enforces the “uptick rule,” which forbids traders from selling a stock that has dropped more than 10 percent in one day. Aside from circuit breakers that “halt” trade at specific levels, futures are not subject to any short-selling restrictions. This is one of the largest advantages of futures trading: Participants are free to profit from downturns in asset pricing as they see fit.
Consistent Depth-of-Market
The futures markets address a wide range of asset classes, including agricultural commodities, equities, energies, financials, and metals. Many of these products feature consistently robust participation. This is a key attribute for active traders. Deep markets promote liquidity and drive periodic volatilities.
As a general rule, “slow” or “dead” markets are difficult to trade. Bid/ask spreads are wide, price action is choppy, and the cost of slippage can be substantial. Consistent market depth is one of the most overlooked advantages of futures trading. Not only does strong order flow promote efficiency, but it also creates an atmosphere conducive to opportunity.
No matter your area of expertise―whether it’s soybeans or stocks―futures offer a liquid product suitable for your strategy.
No Regulation T
According to the Federal Reserve’s Regulation T, a trader must pay for the purchase of a security before selling it. In practice, this means that stock trades made from a cash account take two business days to settle before any proceeds may be used again. For cash accounts with a balance of less than $25,000, round-trip day trades are limited to two per week. If a trader is in violation of this rule, their account is frozen for 90 days.
Although Regulation T was put into place to ensure market integrity and protect investors, it severely limits the capabilities of short-term traders. There are no such restrictions in the futures markets. As long as margin requirements are being satisfied, participants are free to place as many trades as they deem fit. Futures markets are open for business on a near-24/5 basis, so having the ability to trade how and when you want is a major upside.
Capitalize on the Biggest Advantages of Futures Trading
When it comes to active trading, there are few securities that boast the utility of futures. Futures furnish traders with a target-rich, capital-efficient way of engaging the financial markets. There just aren’t too many other avenues capable of delivering these benefits.
To learn more about what futures can do for you, reach out to the industry pros at Daniels Trading. Featuring more than two decades of experience in the markets, the Daniels team can shed some light on why futures may be an ideal way to pursue your financial goals.
