Futures' trading has long been considered gambling by many, however, there are many benefits afforded to the futures trader. In this brief overview, I will outline some of those advantages.
First is leverage. There are few (if any) other investments that offer the leverage available that futures' trading does. For example, the standard size contract for the euro-currency is 125,000 Euros. At the current exchange rate, that represents about $175,000 in currency. The margin required to control this contract is only a few thousand dollars. Think about it, where else can an investor control roughly $175,000 worth of an investment for only a few thousand dollars? Investors do not even have to take out a loan or pay interest on the balance!
The second benefit is liquidity. Commodity trading involves buying and selling contracts that can usually be easily bought or sold at any time. One can even choose to only trade in those markets that have thousands or tens of thousands of contracts changing hands daily. This causes it to be easy to get in, or get out whenever an investor wants.
The third benefit is price transparency. Futures traders have the benefit of knowing that all buys and sells flow through one centralized exchange. This exchange reports up to the second (or millisecond) updates in prices. This means an investor is never in the dark about the true value if his or her investment.
The fourth benefit is strong industry regulation. Futures' trading faces dual regulation from the National Futures Association and the Commodity Futures Trading Commission. All firms and personnel involved must be licensed and adhere to strict industry rules and regulations including ethics guidelines.
The fifth benefit is diversification. Futures' trading has nearly zero correlation to any other investment. The ups and downs of the stock market have little effect on the direction of the futures markets. This allows investors the opportunity to diversify in an asset class with almost no correlation to their other investments.
The sixth benefit of futures trading is professional money management. The futures industry has a large talent pool of professional money managers known as Commodity Trading Advisors. In most cases, these advisors have audited track records and will work primarily for a percentage of the profits they earn for investors.
These are just a handful of the benefits to futures trading, for a more detailed perspective either contact us, or a licensed commodity broker, but, please remember, despite the benefits, commodity trading does carry significant risks and is not suitable for all investors. Past results are not indicative of future performance.
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