Futures Trading – Why Should I Invest in It?
Futures trading, with all of the different terms and strategies, has long been very confusing for many investors. Although there are significant profits to be made in futures trading, with perceived complexity of the futures market and high investment risk, it is not the top choice of investment for many people.
So why do traders choose to trade futures? Let’s look at some of the reasons why should you invest in futures trading.
1. It is a paper investment
Investing in futures trading means you are speculating on the price of a commodity, for example coffee, gold, palm oil or soybean going up or down in the future. But you don’t actually have to own the commodities physically. Instead, you are merely trading a futures contract which is a piece of agreement between investors specifying the details of the commodity being traded such as price, quantity and expiration date.
What this means to you: There are no physical goods being traded, unless of course you forgot to liquidate your contract.
2. You are trading commodities
Commodities are mostly traded in futures market. Commodities like rice, palm oil, soybean, coffee, crude oil and gold are always in demand globally. So there are always people buying and selling these commodities daily.
What this means to you: It is easy to buy and sell futures contracts as commodities are necessities around the world therefore they are always in demand.
3. You can easily grasp the concept
Even with basic trading knowledge, it is possible for you to trade in futures market. You can apply the same analytic techniques you use to trade stock when trading futures as futures prices move just like any other market.
What this means to you: Analyzing the futures market is very much the same as analyzing stock market or foreign exchange.
4. You can start small
To start trading in futures market you only need to deposit a small margin, usually up to 10% of the futures contract value. This means you can trade a much larger amount of a commodity than if you bought it outright.
What this means to you: You can trade a futures contract by paying only a small percentage of its full value.
5. You get profit quickly
Because you are trading with ten-times as much of the commodity secured with your margin, you stand to make money in a short period of time with futures trading. You can even pocket some profit even when the price is going down.
What this means to you: Profit can be gained quickly because you only pay a little amount of money for a large amount of commodities.
6. Transparent market price
After each trading sessions, official market reports will be released. Therefore you already know the prices before trading begins again the following day.
What this means to you: There is no research to do every evening as market prices are released at the end of trading day.
7. You can buy and sell quickly
There are large numbers of contracts traded daily in futures market. This means you can buy or sell futures very quickly as there are always available buyers and sellers.
What this means to you: It is easy to get in or get out of a trade as plenty of contracts are exchanging hands every day.
8. Fixed or negotiable commission fees
Commission fees for futures trading are usually fixed (sometimes even negotiable) and based on the services rendered by the broker, unlike other investments such as stock trading where the commission fees are based on percentage.
What this means to you: You earn extra cash that can be used for trading more contracts instead of using it all to pay for the brokerage fee.
9. You can do it yourself
Technological advancements have made the futures market much more accessible to the individual trader. It is now possible for even lightly capitalized traders to operate effectively in futures market using online trading software. You are able to trade on your own and execute your own order thus saving you on call charges as well as commission fees.
What this means to you: You don’t have to rely on a broker anymore because you can trade independently using online trading software plus you save on brokerage fees.
If you haven’t already done so, take the time to look at futures trading. It could very well provide you with the opportunity for you to be more successful in your investment and gain more profit.
Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.
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