Before I walk you through the pros and cons of futures trading, it is important that you understand how it differs from stock trading.
When you buy a stock, you own a portion of the company. That is, you share ownership with other investors. That’s why we say you buy Involved.
On the other hand, futures trading requires a contract to buy or sell the commodity in the future. That’s why they were called futures.
You can buy or sell these futures contracts as easily as you trade stocks. In this regard, you don’t even have to allocate money. However, you are linking resources in the form of fringes.
The problem is that the margin held is not close to the actual value of the commodity if you were to buy it. This is known as the theoretical value. It is calculated as Market value multiplied by impact.
Well, I just threw you two more terms that need definition:
the Market value It is the price that traders are willing to pay. In general, this is determined by supply and demand. the impact is the number of units of the future indicator.
For example, the E-Mini SP&500 futures contract has leverage of 50. As of this writing it is trading near the market cap of 2100. Multiply that by leverage (50) and you get $105,000. This is the default value for the E-Mini S&P.
As you can see, if you buy the E-Mini S&P contract, you control the value of $105,000. However, unlike stocks, you don’t own them. You only have a contract to buy or sell it, depending on whether you went long or short.
Low margin required
What did you actually pay? This is known as the margin that the broker requires you to maintain while this trade is active. It varies, but it’s about $5,000.
If you buy a stock worth $105,000, you will have to pay $105,000. If you use margin, it will still require you to pay half of that. The advantage of futures contracts is that you only link a small portion.
However, the drawback is that you need to know what you’re doing. If you let futures trading out of your way, you are responsible for a huge investment. Remember, it’s a contract.
This is why traders buy and sell futures contracts without actually buying the commodity.
What is wrong?
When trading futures contracts, you need to do your due diligence in knowing the face value of the futures contract.
If you don’t pay attention to the theoretical value, and the trade continues against you and you don’t close the trade with a small loss, it can get out of control.
You may end up losing a lot of money in a short time. If you reach your margin limits, the broker will close the position if you don’t. This means that you are taken out of the market and may not have the resources to return to it. game over!
For this reason, you should stay young. Don’t add to bad deals hoping to lower your cost bases. Instead, just admit that you were wrong and will be about to play another day when you get the chance.
Advantages?
There are many more, and these are the reasons why I love stock futures. The rest of this article will briefly list the advantages of futures trading.
Long and short trading
Selling with futures contracts is just as easy as buying. It is just a matter of determining which direction you think the market is going.
No limits to day trading
There is no limit to day trading with futures contracts. Stocks can only be traded three times a day before the IRS considers you a day trader. Futures contracts can be bought and sold any number of times per day, allowing one to take quick profits and take advantage of intraday fluctuations.
No laundry sales penalties
The IRS does not penalize your loss and re-enter the same trade within 30 days. When done with stocks, it’s considered a wash sale and you lose the loss deduction benefit unless you can carry it over to future gains on the same stock.
The reason futures contracts are not penalized is because futures contract pricing is recorded as “market-determined”. I won’t go into that here. You can always do a Google search for the term if you’re interested.
Trade 24 hours
Futures contracts are traded almost around the clock, except for weekends and short periods in between to keep exchange records.
European style trading
Stock options follow the American style and can be exercised at any time. When trading stock options, one needs to be careful to avoid exercising them if the option is in the money.
Most futures options trade in the European style, which cannot be exercised before expiration. There are some exceptions, especially with weeklies. This is beyond the scope of this article though.
tax advantage
Futures and futures options are dealt with in accordance with IRS section 1256. This provides a tax advantage since 60% of all gains are considered long-term. This is true even if it is only pressed for a few seconds.