There is a great deal of misunderstanding in general populace about futures trading. Those who know about futures trading are in an excellent position to reap tremendous returns, while those who are under misleading information miss out on this opportunity.Granted, futures trading is not for everyone. But, it would be of great benefit for anyone to learn more about this investment vehicle than to dismiss it offhand.
If you wanted to invest in a commodity there are several ways you can do it. Let’s take gold as an example.
One way to invest in commodity “gold” is to own shares of a gold mining company. That way, if price of gold increases there may be a rise in share price of that company.
Then again, price of that company’s share may not increase, or only increase a portion of actual increase in gold price. There are many other variables at play that may prevent those share prices from increasing.
Another way to invest in commodity “gold” is to actually buy gold, such as coins or wafers, and if price increases you can sell it for a profit. But, there may be all sorts of fees and charges in addition to price you pay for gold, which means you are really paying more than fair market value.
In these two instances we are predicting an increase in price of gold. But, what if price goes down. Then, you have taken a loss on these transactions.
Of course, you have taken a loss only if you sell your shares in gold mining company, or sell actual gold you are holding, otherwise it is just a loss on paper. Naturally you would like to hold on to shares, or gold, in hopes that price will eventually increase and you can at least recoup your initial investment, if not come away with a small profit. But, that could take some time.
Another way to invest in commodity “gold” is to purchase a gold futures contract. This is very easy to do, and you can go long a contract, or short, depending on where you see price of gold heading.
Trading futures contracts gives you powerful trading advantages not found in any other type of investment. Futures contracts, regardless of underlying commodity, provide you with a very powerful trading advantage in several ways.
1) Almost anyone can do this.
Trading futures contracts is not rocket science. It doesn’t matter about your age, gender, level of education, or present circumstances. Almost anyone can learn how to trade futures contracts.
The futures trading community is made up of stay-at-home moms, retirees, students, couples or individuals trading part time, and many others too numerous to mention in this brief report.
Like any other skill you start by learning basics, and once you have mastered them you can go on to more advanced techniques. The great thing about futures trading is that simple trading basics are really all you need to take advantage of opportunities to reap tremendous profits. The basics will provide you with a solid foundation should you wish to try out other trading systems in future.
2) Efficiency.
Futures markets trade massive volumes and attract global involvement. This makes these markets extremely liquid, which in turn allows traders to enter and exit markets easily and efficiently. Traders are able to buy and sell very large, or very small, orders without penalty.
Also, most electronically traded futures markets are open nearly 24 hours a day, allowing traders to enter and exit markets without having to wait for exchange trading floors to open.
3) Transparency.
The massive trading volumes and global public input in futures trading creates actual price discovery. This means trading price, at that moment, is aggregate of opinions of all traders buying and selling that commodity. It is like a global auction, with people bidding from around world.
And, prices listed on commodity markets throughout world and instantly transmitted all over world. These prices are available immediately, and help every trader, and others interested in price movements, make better- informed decisions.
4) Pure play.
A pure play means that if you want to buy a commodity such as gold, then buy gold futures, not shares in a gold company or bullion. The shares may not increase, for any number of reasons, as price of gold increases. Buying bullion may not be cost effective.
Buying gold futures contracts is most efficient and cost effective way to play gold market. This goes for all other underlying commodity markets as well.
5) Leverage.
When you trade a futures contract you are required by Commodity exchange to put up a margin amount. If your previous investment experience has been in stock markets you know term margin has to do with a cash down payment and money borrowed from a broker to purchase stocks. In futures trading, term margin has an altogether different meaning and purpose.
Rather than providing a down payment, margin required for futures contracts is actually a performance bond, or, a good faith deposit.
Margins are set for each commodity by Commodity exchange. The margin amounts are subject to change by Commodity exchanges, and usually depend upon volatility of commodity.
Margin amounts are minimal when compared to overall value of contract.
Commodity markets offer investors an opportunity to diversify their holdings, and potential to earn a higher rate of return. This higher rate of return stems from fact that futures trading is a highly leveraged form of speculation. In other words, a small initial investment controls contracts worth a great deal more.