by Lauren Short
Futures trading may be the stock market’s best kept secret to boost your stock market portfolio and wealth. With proper insight and direction, you could become an arriviste by simply looking into trading futures instead of traditional stocks. This investment system can show a tremendous boost in your portfolio with measures in place to protect your money in the long run.
Moreover, the continued unreliable nature of the stock market leaves many unsure on which stocks to purchase or sell. While other investment strategies like trading indices or breakout momentum have the potential to safeguard against a loss of assets, they do not always have the financial security of investing in futures.
What is Futures Trading
Futures are a type of contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price. In typical futures contracts, one party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. The selling party to the contract agrees to provide it. These contracts are traded on futures exchanges like agricultural products, currencies, energy, interest rates, metals, stock indexes and cryptocurrencies. Importantly, they require a brokerage account approved to trade futures. The strategy is designed to have a long shelf life, trading consistently year after year regardless of the state of the economy.
Above all, future trading is a highly trusted strategy because of its solid record of performance for over five years. The stock Indices it trades within include the Dow Jones, Nasdaq, Russell 2000, Emini S&P 500, and the Emini S&P MidCap 400.
What are futures contracts?
Futures contracts are standardized and will typically specify the following parameters:
- The quantity of goods to be delivered or covered under the contract.
- The currency unit the contract is being denominated in.
- The currency which the futures contract quotes.
- The unit of measurement in the trade.
- How the trade will be settled.
- The type of grade or quality of the goods when appropriate.
How Futures Trading Works
To trade futures, an investor has to put in a fraction of the total amount (typically 10% of the contract value). This is known as a margin and is essentially collateral that the investor has to keep with their broker. This happens in case the market moves opposite to the position they have taken and losses incur. Successful trading of futures can open an investor to a much greater value of stocks than the original purchase. Their profits also multiply if the market moves in the predicted direction (10 times if the margin requirement is 10%).
Importantly, futures trading relies upon the known history of a given stock to make an assumption of how it will behave in the future. As a result, a trader can use this information to identify stocks that show promise of rising again. Furthermore, this enables traders to survive economic crashes or cutbacks from enterprises.
Differences Between Trading Futures vs Stocks
It can be unclear about what exactly the differences are between futures and stocks. Although they do have some things in common, futures are contracts with expiration dates while stocks represent ownership in a company. Check out this chart below to compare some other important difference about the two investment options:
|Trading||Through an organized exchange||Through an organized or over-the-counter exchange|
|Represents||A commitment to buy or sell something in the future at an agreed upon price||Ownership of a corporation|
|Issued by||A futures exchange writes the terms of each contract and makes it available for trading, but does not specifically issue it||A corporation|
|Maximum number issued||No limit||Set by corporate charter with position limits and accountability in stock index futures|
|Cash Flow||In and out flows to traders’ accounts are based on daily debiting or crediting of each futures account, based on that day’s changes in the price of the contract held||May receive dividends|
|Ability to Sell Short||Yes, without a necessary uptick in price||Permitted under special circumstances. A short sale is only made when the stock price goes up a tick|
|Trade Length of Time||Typically short term
Fixed expiration date, usually less than one year
|Typically long term
Stocks are perpetual as long as the underlying company remains solvent
|Money||Buyers and sellers deposit a designated performance bond in an account; the amount is a percentage of the current value of
As contract prices change you may be required to provide additional margin
Buyer purchases shares and the margin may be paid as a down payment in some cases.
Broker may ask for additional money from the person buying or selling on margin due to additional price changes in the stock
|Monitoring||Traders must be aware of expiration date and last trading time||Constant monitoring of state of market heavily recommended|
|Risk||Depending on any price changes, as more than the initial investment can be lost||If the stock is not bought on margin, the most that can be lost is the entire investment|
Futures trading involving commodities have strong tax breaks, which could result in a savings of more than 80% in income taxes when calculated by the IRS. This is all depending on the amount and type of income gained from the sale of commodities futures. If you are unsure of where to begin, focus on futures trading in precious metals, industrial indices, or trades with a majority of in-demand stocks. However, be weary of false in-demand stocks when stock prices drop and there is a slight buying rush.
How to Invest
Futures trading is relatively easy to begin. To start, you will want to open an account with a broker that supports the markets you want to trade. It is normal for a futures broker to ask you questions regarding your experience with investing, income and net worth. This is to determine the amount of risk the broker will allow you to take on, in terms of margin and positions.
Unfortunately, there is no industry standard for services, commission and fee structures in futures trading and it is very important to research for a trusted firm. FFR Trading is a highly recommended company, as a boutique, due diligence research firm specializing in the stock market and futures trading strategies. The team is made of real investors passionately seeking certifiable investment strategies that have a track record of success. FFR has multiple trusted professional institutional level traders who are happy to walk you through the process of futures trading, regardless how experience you may be. I highly recommend signing up to learn more about their futures trading program and begin building a strong trading portfolio today.