How Futures Contracts Give You Powerful Trading Advantages

Rob Hall

How Futures Contracts Give You Powerful Trading Advantages
 by Rob Hall
 
 There is a great deal of misunderstanding in the general
 populace about futures trading. Those who know about futures trading are in an excellent position to reap
 tremendous returns, while those who are under misleading information miss out on this opportunity.
 
 Granted, futures trading is not for everyone. But, it would be of great benefit for anyone to learn more about this investment vehicle than to dismiss it offhand.
 
 If you wanted to invest in a commodity there are several ways you can do it. Lets take gold as an example.
 
 One way to invest in the commodity
 gold is to own shares of a gold
 mining company. That way, if the price
 of gold increases there may be a rise in the share price of that company.
 
 Then again, the price of that companys share may not increase, or only increase a portion of the actual increase in the gold price. There are many other variables at play that may prevent those share prices from increasing.
 
 Another way to invest in the commodity gold is to actually
 buy gold, such as coins or wafers, and if the price increases you can sell it for a profit. But, there may be all sorts of fees and charges in addition to the price you pay for the gold,
 which means you are really paying more than fair market value.
 
 In these two instances we are predicting an increase in the
 price of gold. But, what if the price goes down. Then, you have taken a loss on these transactions.
 
 Of course, you have taken a loss only if you sell your shares in the gold mining company, or sell the actual gold you are holding, otherwise it is just a loss on paper. Naturally you
 would like to hold on to the shares, or the gold, in the hopes that the price will eventually increase and you can at least
 recoup your initial investment, if not come away with a small profit. But, that could take some time.
 
 Another way to invest in the commodity gold is to purchase
 a gold futures contract. This is very easy to do, and you can go long a contract, or short, depending on where you see the price of gold heading.
 
 Trading futures contracts gives you powerful trading advantages not found in any other type of investment.
 Futures contracts, regardless of the underlying commodity, provide you with a very powerful trading advantage in
 several ways.
 
 1) Almost anyone can do this.
 
 Trading futures contracts is not rocket science. It doesnt matter about your age, gender, level of education, or present circumstances. Almost anyone can learn how to trade futures contracts.
 
 The futures trading community is made up of stay-at-home moms, retirees, students, couples or individuals trading part time, and many others too numerous to mention in this brief
 report.
 
 Like any other skill you start by learning the basics, and once
 you have mastered them you can go on to more advanced techniques. The great thing about futures trading is that
 simple trading basics are really all you need to take advantage of the opportunities to reap tremendous profits. The basics will provide you with a solid foundation should you wish to try out other trading systems in the future.
 
 
 2) Efficiency.
 
 Futures markets trade massive volumes and attract global involvement. This makes these markets extremely liquid, which in turn allows traders to enter and exit the markets easily and
 efficiently. Traders are able to buy and sell very large, or very small, orders without penalty.
 
 Also, most electronically traded futures markets are open nearly 24 hours a day, allowing traders to enter and exit markets without having to wait for the exchange trading
 floors to open.
 
 3) Transparency.
 
 The massive trading volumes and global public input in futures trading creates actual price discovery. This means the trading price, at that moment, is aggregate of the opinions of all the traders buying and selling that commodity. It is like a global
 auction, with people bidding from around the world.
 
 And, the prices listed on the commodity markets throughout
 the world and instantly transmitted all over the world. These prices are available immediately, and help every trader, and others interested in the price movements, make better-
 informed decisions.
 
 
 4) Pure play.
 
 A pure play means that if you want to buy a commodity such as gold, then buy gold futures, not shares in a gold company or bullion. The shares may not increase, for any number of reasons, as the price of gold increases. Buying bullion may not be cost effective.
 
 Buying gold futures contracts is the most efficient and cost effective way to play the gold market. This goes for all the other underlying commodity markets as well.
 
 5) Leverage.
 
 When you trade a futures contract you are required by the Commodity exchange to put up a margin amount. If your
 previous investment experience has been in the stock markets you know the term margin has to do with a cash down payment and money borrowed from a broker to purchase stocks. In
 futures trading, the term margin has an altogether different meaning and purpose.
 
 Rather than providing a down payment, the margin required for futures contracts is actually a performance bond, or, a good faith deposit.
 
 Margins are set for each commodity by the Commodity exchange.The margin amounts are subject to change by the Commodity exchanges, and usually depend upon the volatility of the commodity.
 
 Margin amounts are minimal when compared to the overall value of
 the contract.
 
 Commodity markets offer investors an opportunity to diversify their holdings, and the potential to earn a higher rate of return. This higher rate of return stems from the fact that futures trading is a highly leveraged form of speculation. In other words, a small initial investment controls contracts worth a great deal more. This is because as a futures contract rises or falls, the unit price is magnified by the degree of leverage.
 
 Lets look at an example to help clarify this.
 
 A futures trader buys one (1) contract for Corn at an entry price of $2.00, and later sells that contract at an exit price of $2.10.
 This represents a return of 83%.
 
 
 Heres how it works: 1 contract of corn represents 5000 bushels.
 The entry price was $2.00, which is $2.00 a bushel, making the
 total contract worth $10,000.00.
 
 Lets say the margin requirement for corn is $600.00. So, for $600.00 you are controlling one corn contract worth $10, 000.00.
 
 The contract was sold for $2.10, for a total contract value of $10,500.00, which means that trader has made a profit, before commission, of $500.00.
 
 So the trader has basically invested $600.00 and has made a return on that investment of $500.00. The return on investment of $500, divided by the margin of $600 = an 83% return on that
 investment.
 
 This trader has made a profit of $500.00,less commissions, and of
 course, still has the margin amount of $600.00,.
 
 Leverage is a two-edged sword. It can create tremendous gains or losses, so must be used wisely.
 
 
 6) Transaction costs
 
 Transaction costs in the futures markets are small compared to most other markets. Commissions are usually $50.00 or less to buy and sell a contract which can easily have an underlying value of $50, 000.00 or more.
 
 
 7) Variety.
 
 Futures markets provide a tremendous variety of investment opportunities. There are the traditional markets like grains, metals and food. There are financial futures markets that trade
 contracts on all sorts of interest rates, stock indices, and currencies. Then there are the energy futures markets that provide opportunities in crude oil, natural gas, heating oil, and gasoline.
 
 The incredible variety of futures contracts allows traders to
 take trading positions for nearly any opinion one can have about the developments in the markets.
 
 
 8) The Ultimate Home Business.
 
 Can you think of any other business where you have an opportunity to earn unlimited income, spend more quality time with your family, have more free time for your other interests,
 and live the lifestyle you want?
 
 A home business where:
 
 Returns of 200%, and more, are very common, and those returns are often made within a few days.
 
 It doesn't require a big outlay of cash to get started.
 (One trader, who became legendary, started with about $400.00 and turned that into about $20,000,000.00. yes, that is twenty million dollars).
 
 As you can see from the above point, your profit potential is virtually unlimited.
 
 Your income is not limited to your personal output. You do not have to work harder or longer to make more money.
 
 You are in full control of your business. You make all of the
 decisions, and answer to no one.
 
 There's no marketing or advertising expenses (in any other business these are major expenses).
 
 Your business is global in scope.
 
 This is a cash business; you don't have to worry about any credit terms.
 
 Your business is recession proof, so it doesn't matter what the economy is doing.
 
 You don't have to worry about payrolls, employee benefits,
 absenteeism, or any staffing related problems, because your
 business does not need employees.
 
 Because there are no employees you do not have any labor costs, which are usually a very substantial expense in any organization.
 
 Your start-up costs are up to you.
 
 Running your commodity trading business doesn't take up much of your time so you can have ample free time for your family and other interests.
 
 Your overhead expenses are low.
 
 You determine how much time to spend on your business. You can start small and grow at your own pace.
 
 Your business can be operated from just about anywhere in the world.
 
 Your business involves products that are in constant demand by people and businesses all over the world, yet you do not handle these products. Therefore, you won't have to worry
 about selling anything, storing inventory, or having merchandise
 returned.
 
 There are no customer complaints, or outstanding accounts to try to collect, because your business does not need customers.
 
 Your business has nothing to do with Multi Level Marketing, or Network Marketing. You do not have to try and recruit others, then help them to recruit others, and so on, and so on. There's no down-line or up-line to
 worry about.
 
 Your business satisfies your intellectual (and often emotional)
 needs, as well as your financial needs. There's nothing like being
 fascinated with what you're doing. When that happens you're not working, you're having fun.
 
 
 Futures markets represent a wide and diverse cross section of the global economy. This diversification and the energetic nature of futures speculation make these markets attractive to many investors, whether they want to diversify their holdings or, are seeking a higher risk/return investment.
 
 All serious investors should allocate some portion of their portfolio
 to futures trading.
 
 
 
 
 
 
 
 

Rob Hall is a successful futures trader, President & CEO of his own
trading firm, and international author. His books on learning to
trade futures markets are distributed through Sumas International
Sales Ltd. View them at
http://www.futuresopps.com/Commodities.htm

Posted by World Best Articles.com :: 2:48 AM :: ---------------oOo---------------