Advantages of Futures Trading

futures-tradings.com1. The high leverage
It only needs a small fraction of the value of the contract as margin to buy a futures contract. The investor can trade a much larger amount of the commodity than if he bought it outright, so if he has predicted the market movement correctly, his profits will be multiplied. So, compare with buying the physical commodity, the leverage proved to be a great advantage.
The margin required to hold a futures contract is a form of security bond. If the market goes against the trader’s position, he may lose some. But if the market goes with the trader’s position, he makes a profit and he gets his margin back.
For example, say you believe gold in undervalued and you think prices will rise. You have $3000 to invest – enough to purchase:
• 10 ounces of gold,
• or 100 shares in a mining company.
Two months later, gold has rocketed 20%. Your 10 ounces of gold and your company shares would now be worth $3600 – a $600 profit; 20% of $3000. But your futures contracts are now worth a staggering $72,000 – 20% up on $60,000.

2. Easy and convenient
Speculating with futures contracts is just a paper investment. You don’t have to literally store 3 tons of gold in your garden shed, or have 500 live hogs running around your back garden!
The actual commodity being traded in the contract is only exchanged on the rare occasions when delivery of the contract takes place. In the case of a speculator, a futures trade is purely a paper transaction and the term ‘contract’ is only used mainly because of the expiration date being similar to a ‘contract’.

3. Quick profit
Investors can make money more quickly on a futures trade. Firstly, because he is trading with around ten-times as much of the commodity secured with his margin, and secondly, because futures markets tend to move more quickly than cash markets.

4. The liquid market
Futures markets are very liquid, i.e. there are huge amounts of contracts traded every day. This ensures that market orders can be placed very quickly as there are always buyers and sellers of a commodity. For this reason, it is unusual for prices to suddenly jump to a completely different level, especially on the nearer contracts.

5. Less commission charges
Compared with other investments, the futures trading commission charges is small. Commissions vary widely depending on the level of service given by the broker. Online trading commissions can be as low as $5 per side. Full service brokers who can advise on positions can be around $40-$50 per trade. Managed trading commissions, where a broker controls entering and exiting positions at his discretion, can be up to $200 per trade.