The volatile nature of the stock market leaves many traders cautious when considering which stocks to purchase, sell, or sit-it for a time. While alternative investment strategies, such as trading indices or breakout momentum stocks, have the potential to safeguard against a loss of assets, they do not always have the financial security of investing in futures. Before selecting a stock to trade based on its future, you must understand what constitutes futures trading, how different types of futures trading can affect taxes, and the key factors for determining the future success of a stock.
Futures Trading
Ultimately, futures trading relies upon the known history of a given stock to make an assumption of how it will behave in the future. By using this information, a trader can identify stocks that show promise of rising again, which enables traders to survive economic crashes or cutbacks from enterprises. Trading techniques that focus on investing in futures can be applied to any stock, but you need to know how security futures differ from commodities futures.
Security Futures vs. Commodities Futures
Although the futures trading principle allows for traders to analyze a stock’s history, it does not offer any protection from taxes levied by the Internal Revenue Service. According to the Commodity Modernization Act of 2000, any grouping of 10 or more stocks qualifies as a commodity, which can result in significant benefits when filing taxes.
Key Factors for Identifying Successful Futures
There are several factors that help traders select stocks with a promising future, and they include the following.
Will the Stock Be In-Demand?
Some stocks are easily identifiable as a necessity for society, such as precious metals, wheat, or oil. These stocks are all commodities, and they will garner significant tax savings. However, each material should be considered with how it has behaved in previous months.
Do the Stocks’ History Show a Rebound?
Although some stocks may be in-demand, it may be the result of a flooded market or a decision to sell large shares of a given stock at low prices. However, stocks involving indices or commodities have a history of highs and lows are the most likely to bring in a high return on investment when the stocks’ future amount returns to a higher level.
Consider how the example in Exhibit A alludes to a continual drop in the value of several in–demand stocks.
Stock | January 2014 | December 2014 | Change |
Gold | $1200.20 | $1,183.90 | Down $16.30 |
Silver | $16.23 | $15.56 | Down $0.67 |
Platinum | $1,218.10 | $1,208.90 | Down $9.20 |
Palladium | $804.20 | $798.40 | Down $5.80 |
S&P 500 | 2,080.35 | 2,058.90 | Down 21.45 |
Dow Jones | 17,983.07 | 17,823.07 | Down 160.00 |
How Futures Trading Provides Asset Protection
However, the history of these stocks reveal a security net within Exhibit B. Exhibit B identifies the changes in the stocks’ value in January of 2010 to January 2011.
Stock | January 2010 | January 2011 | Change |
Gold | $1,089.20 | $1,333.80 | Up $244.60 |
Silver | $16.918 | $28.174 | Up $11.256 |
Platinum | $1,547.50 | $1,788.80 | Up $241.30 |
Palladium | $430.90 | $813.65 | Up $382.75 |
S&P 500 | 1,217.56 | 1,286.12 | Up 68.56 |
Dow Jones | 10,172.98 | 11,891.93 | Up 1718.95 |
Notice that the price of gold began 2010 with prices below the ending price for 2014. However, the price rapidly climbed within 2010, and today, it appears to be dropping once more. Furthermore, an investment within the Dow Jones or S&P 500 indices would have still increased as well, although, the mild drops within the indices is a minor fluctuation. When the price of gold begins rising once more, the indices will rise once more. Even if the price of precious metals were to drop back to levels at the beginning of 2010, the indices monstrous gains over the last five years would continue bringing in a high return on investment. As a result of these values, the assets invested in futures would be in a secure location and protected against downfalls of other stocks.
Key Points to Remember
- 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, depending on the amount and type of income gained from the sale of commodities futures.
- You need to review at least five years worth of data prior to selecting stocks for protecting investments with futures trading.
- Trade with a majority of in-demand stocks; be weary of false in-demand stocks when stock prices drop and there is a slight buying rush.
- When in doubt, focus on futures trading in precious metals and industrial indices.
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