You’ve heard people talk about investing in futures, but you’ve always just stuck with traditional stocks and funds that you understand. Could 2017 be the year you finally dip your toes into the futures waters and see what it’s all about? High returns abound for those willing to learn the ropes.
The benefits of investing in futures
In case you’re unfamiliar with the specifics, a futures contract is a forward contract that can be traded between parties. One party agrees to buy and another agrees to sell an asset for a specific price with delivery and payment to be made at a future date. Because it’s essentially a function of an underlying asset – such as wheat, coffee, oil, beans, etc. – a futures contract is a derivative product.
There are two major types of futures investors. First, you have hedgers. These are the people who actually have an interest in the underlying asset and are looking to hedge their risk. For example, a rice farmer with a large crop may invest in rice futures in order to offset any negatives that could come with sudden and steep price declines.
The second type of futures investor is a speculator – which is the category into which you likely fall. Speculators tend to be day traders who make educated investments with the hopes of getting a strong financial return.
From a speculator perspective, there are numerous benefits to investing in futures. Let’s take a look at some of them to give you an idea of whether the potential rewards are worth the risk.
Access
The first benefit of futures investing is the easy access. Anyone can get started without much fuss. You can take a do-it-yourself approach and use one of many online platforms, or you can open a managed account and let a broker handle your trades for you. There’s also something known as a commodity pool, which acts much like a mutual fund.
The key is to educate yourself early on – this RJO Futures Trading Guide is a good start –and to learn everything you possibly can before diving in. What you’ll discover is that access can be a positive or negative. Do your research, and it will benefit you far more than it hurts you.
Leverage
Futures are highly leveraged investments, which can be a benefit or disadvantage depending on how you look at it. From the positive side of things, you only have to put up something like 10% of the contract value in order to be invested. This allows you to do more with your money.
Liquidity
Unlike certain investments that require you to stay in for a period of weeks, months or years to realize a return, future contracts are highly liquid. Trades can be placed quickly and contracts can be purchased for 24 hours. This makes it ideal for people who don’t have the ability to tie up cash for long periods of time.
Volatility
What few outside of the industry realize is that futures are highly volatile. Again, this can be viewed as a positive or negative. But unlike certain markets that may only inch up or down a fraction of a percentage in a day, futures contracts can see big swings in valuation. This means there are opportunities to earn quick, sizable returns.
Futures investing: Give it a shot
There is certainly a fair amount of risk that comes with investing in futures. The fact that you can lose more than you put up should make you think carefully before pursuing this strategy. But if you take the time to learn the ropes and figure out what you’re doing, the rewards far outweigh the risks.
