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Anna Johansson
Anna Johansson
Articles (38) 

Why Trading Futures Is a Great Way to Diversify Your Portfolio

Trading stocks is often the go-to investment strategy, particularly for those who are just starting out

November 26, 2017

As you dive into the investor’s market, whether as a beginner or a seasoned investor, you must think over all your options. Trading stocks is often the go-to investment strategy, particularly for those who are just starting out. However, there may be some cases in which trading futures is a better way to diversify your portfolio and bring higher returns.

Trading futures offers some unique benefits that Forex stocks and equities don’t, especially for those who are still learning things about the market. It’s true that there are still risks when it comes to futures, and it may not be suitable for your entire investment portfolio, but it can be a great way to add diversification and improve your success rates.

As you consider this possibility, think about these benefits of trading futures over stocks.

High Leverage Investment

To trade futures, an investor must put down a margin, which can have higher yields than a typical stock exchange. “What trading futures essentially means for the investor is that he can expose himself to a much greater value of stocks than he could when buying the original stocks,” explains an article from Investopedia. “And thus his profits also multiply if the market moves in his direction (10 times if margin requirement is 10%).”

The high leverage that applies to these particular stocks offers a huge earning potential when compared to your potential with stocks. Of course, this also equates to higher risk, but what’s investing if you aren’t willing to take a little risk?

More Efficient Market

The market for futures is spread much wider than Forex, which gives the trade more time to move in your favor. The spread is much more predictable, so timing the market is easier. You can often wait just long enough to see futures in a bad market move just past the break-even point before you’re forced to pull out.

Forex, on the other hand, is essentially “created” by the firms who run it, which means they can adjust the spread. This makes it harder for investors to time things, and you run a greater risk of losing big on an investment.

A Central Regulated Exchange

A key factor for stock exchange volatility is the lack of a central exchange for Forex trades. They occur on any exchange floor or equipped computer, and there’s no centralized place where things can be monitored and compared. You’ll often find yourself at the wrong end of your own brokerage as well, making it difficult to find trades that work in your favor.

All futures trades occur through the Chicago Mercantile Exchange, which means that you can locate official information about all trades and sales. The public can see them on a first come, first serve basis, as long as they follow the rules set by the CME. This easily accessible body of knowledge lowers risks considerably.

More Time to Access the Market

The futures markets are open almost 24/7, so you can make trades no matter where you are or what you’re doing.

CNBC markets commentator Jon Najarian told the symposium: "Futures really allow you [to] basically define levels of anything -- from natural gas and crude oil to gold or E-minis -- and then take advantage of it, literally 24 hours a day."

This is one of the biggest disadvantages of the Forex market, since it can be closed during some pivotal points in trading. For example, following the 2016 presidential election, the S&P 500 futures dropped by more than 100 points, a prime opportunity for investment. Because the stock market was closed at that time, those who ignored opportunities in futures were unable to take advantage.

Different Taxation Benefits

"The idea about trading futures that most people don't realize is there are tax benefits, you're taxed at a lower rate," said Carley Garner, futures-and-options trader at DeCarley Trading. "It's easier to file your taxes, that's obviously a big deal."

Futures profits are taxed at a rate of 60/40, meaning that 60 percent is taxed at the minimum rate and 40 percent at the maximum rate. Securities and stocks are usually taxed at the maximum rate, so you get less of a tax break with these trades.

Trading futures isn’t for everyone, and it may not be the best option if you don’t have other investments up your sleeve. However, it can be an excellent form of diversification if you take full advantage of these benefits listed above.

Disclosure: I do not own any of the stocks mentioned in this article.

About the author:

Anna Johansson
Anna is a freelance writer, researcher, and business consultant. A columnist for Entrepreneur.com, HuffingtonPost.com and more, Anna specializes in entrepreneurship, technology, and social media trends. Follow her on Twitter and LinkedIn.

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