WHY Futures Trading?
liquidity makes a difference
Why futures? First off, liquidity. Most commodity markets are very liquid. Transactions can be completed quickly, which lowers the risk of adverse market moves between the time you make a decision and when you pull the trigger on a trade.
Futures trading allows you to use a leveraged account, where you can purchase a contract on margin and do not have to pay in full, as you generally do with stocks. For example, the margin requirements for oil are often as low as 5% of the value of the investment, so in theory you could buy $10,000.00 worth of oil futures for only $500.00. Please note that lower margin mathematically implies higher risk so we ask that you use caution.
This can equate to a lower hurdle to entry when trading futures. And it differs from stock trading, where the trader must put up around 50% of the value of the stock. Moreover, a commodity futures investor is not charged interest on the difference between the margin and the full contract value.
Another possible benefit is that futures represent real physical goods, which have real value, unlike stocks, which could be overvalued due to a plethora of financial reports.
FEWER CHOICES CAN IMPROVE EFFICIENCY
The futures market represents a finite universe of choice - and so is sometimes considered easier to manage than say, stocks, where you could conceivably scan through tens of thousands of stocks to find your market. There are less than 50 major futures markets and you can often get by with only watching 3 to 5 markets.
In futures, every commodity is different so you can find one to match your goals and style as a trader. For example, agricultural commodities price movements can be sudden and large in magnitude due to their subjectivity to weather and climate conditions, while the demand for metals commodities are dependent upon longer-term factors such as economic activity rather than seasonal issues.
The concept of trading futures is relatively easy to understand. While it is a good idea to trade with someone who can ‘show you the ropes’ of futures trading, it is comparatively easy to get started. Please note that commodity futures can potentially be very volatile! It is highly advisable to not jump in blindly but to get some support or guidance from an experienced trader to help you navigate the market and develop a trading strategy before you try to go it alone.