Nowadays retail traders considering future trading market due to the advantages of futures trading. Basically, the futures trading market originated in the commodity sector. As the growers and producers who wanted to manage the risk of not knowing the price when the commodity and production reach to the market. Their efforts and regulators inventions give birth to future contracts. Principally in this market a seller reach agreement to sell a particular quantity of a commodity on the specific future date which is also called the expiry date. Supply and demand prospects of future decide the price in current times.
Now a days futures trading market is more than commodities like FX pairs, indices and many other products also included in the list. It may not be best trading market for stocks but for investors and hedgers its market which enables them to cover the risk.
Standardized features of the contracts make them readily acceptable and fair to trade. In the old times it was only possible to trade the complete contract but now a day’s technology makes it possible to trade in the small denomination.
Key Advantages of Futures Trading
Future contracts, because of the way they are designed and traded in the specific exchange, have many Intrinsic advantages over trading stocks. Lets have a look on the advantages of futures trading.
Low Investment Required
To start futures trading relatively low investment is required as leverage makes it possible to buy a contract while paying a fractional cost. Which is great advantage specially for stock traders.
Usually stock traders need heavy account to earn reasonable. But here in futures trading leverage makes it possible to take a small start.
Big Earning Potential
Returns which are possible with this leveraged futures market are not possible with the stocks trading. Due to leverage trader can hold more contracts which ultimately result in more profits.
With the count of time stock traders are aggressively getting involved in the futures trading market as its more stable and easier to trade market with greater earning potential.
This is the major one from the advantages of futures trading.
Fixed Upfront Trading Costs
The future trading market is an established one and standard procedures remain the same over the time. Like margin requirements for all of the future contracts are well known.
In the volatile day’s margin requirement may increase but most of the time it remains the same. They are unchanged from years and a futures market trader knows it well so he can calculate the margin very easily.
It brings really good results as a futures market trader knows in advance how much he needs to put in as initial margin.
No Time decays
This is a considerable benefit of futures trading as know the phenomena of time decay. In which benefit decrease with the count of time which can turn a winning position into a losing one. Time decay phenomena are not applicable in the futures trading.
From the advantages of futures trading, this one is the most prominent one and there is no match of it in the stock market. Liquidity is another major benefit in futures trading. Nearly all of futures trading markets are very deep and highly liquid. Which result in the tight spreads and speedy execution of orders especially in commodities, currencies, and indexes. A future trader can exit from a position when ever he wants.
Pricing Is Easier To Understand
Price in the futures trading market is similar to the spot Forex and stock prices. Brokers do not announce or list the expiry price. That is determined due to supply and demand while trading the contract in the market.
For a trader who holds the future contract for him, the future price will be the same as the current spot price plus the cost of carrying trade.
If there is an imbalance between future and spot prices then we may experience arbitrage activity which can balance both.
Reduced Counter-Party Risk
In the futures trading market, all the contracts are traded in the exchanges centrally and clearing members provide the guarantee of the payment. Which somewhat decease the counter party Risk because future contracts are on exchanges.
Low Trading Cost
Normally spreads are just one tick the least movement in the futures trading market. Which is nearly fifty percent less as compare to the other markets so trading operations and doing the business cost is on the lower side and also an attraction tool for investors and traders.
Can Go Long or Short
This is a new concept for stock traders as they can only go long in the normal course. But here in the futures trading market one can make money while taking long trades as well as from the short trades. Which doubles the opportunities and increase the earning potential dramatically.
Efficient and Fair Market
The futures trading exchanges are the self-regulatory bodies but the regulatory framework is there to look after and for oversight purpose. The contracts offered in these exchanges are standardized contracts.
Like in a single asset the quantity of each contract will be the same for the same expiry that means the same price for each of contract. Regulations of these self-regulatory bodies and guidelines of regulators are well defined.
Ability to Make Substantial Profits
Investing in the futures trading market can be extremely lucrative. Many of investors make tens of thousands of dollars from a single trade. While for the same returns in the stock market more investment will be required. Future investors can see good appreciation and fall in the price and many times a sudden one.
Investors who can predict well love to trade such markets. Anyone who can hold the contract for the longer term usually gets more appreciation it enters on a good level.
Easy Trading Concept
Futures trading is easy to understand. In the very start although it is a good idea to get guidance from a professional trader who can show you the ropes of futures investing. It will strengthen your decision-making process which ultimately leads you towards better profitability.
It is relatively easy to get started because things are so simple. Anyone who gives time can make efforts can make a trading strategy for this market.
Disadvantages of Futures Trading
For many traders, investors and hedgers futures trading is a popular and attractive investment option. Even many of investors make million and a lot of investors earn a fortune with futures trading. John Henry the owner of Boston Red Sox baseball team is one name.
So we cannot neglect the advantages of futures trading.
But there are many who lost large investments in this market due to disadvantages of futures trading. The very basic disadvantages are very obvious one as the word Future is the self-explanatory one. There are many factors involved in futures trading and increase the risk like,
Controlling Future Events
While trading futures lack of control over the future is the biggest disadvantage. Many of are us only consider one side to cover the risk with the future market but there are always two sides one is buying and one is the selling.
In worse conditions, one has to suffer from the losses like in case of any disaster.
Like the change in the weather can harm the supply route and overall corp. devaluation in the country’s currency and borrowing defaults can be other reasons.
Complex For New Investors
Futures trading is a complex job for investors. Do not invest until you fully understand the risk and related things. For investors holding time is a bit longer and if there is no return in the end that will bring a lot of pain for investors.
New investors usually do not have an understanding of these complexities like national and international weather and politics along with financial conditions.
Over the count of time everything never runs smooth and in such conditions leveraged trading can bring up unseen challenges.
You are dealing with the leveraged product so spikes and whipsaws can be challenging to handle as if ignored then may suffer from the margin call. This hindrance involves the sometimes-fast movement of futures prices and it may through you out of the market. In high volatility days, the broker may require to add additional funds especially when you margin dropped below the minimum level. Means in such condition you must transfer more funds to hold your positions.
Near the expiry date, the price even the fixed one become less attractive for the investors. In the near to expire contracts investment nearly stalls that may push the contract to expire with no gains.
Cannot Be Partially Closed
They are traded in the specific amounts and cannot be partially closed. A contract cannot be broken into parts.
There are a lot of advantages of futures trading which are not possible in any other financial market.
But keep in mind that fruitful futures trading necessitates skills, of course, If one has it then risk can be managed or reduced to the minimum. As compared to other market futures trading is less risky and with basic knowledge, a trader can take a start.
The futures market ensures a great deal of potential to make simply excellent rates of return though, provided one is up for it and has the skill and bankroll to achieve these results.