Any time you hear about futures trading, what pops into your head? Think of gambling? High risk stakes? Speculation? Here's the paradox -- whenever used the right way, futures trading can be helpful in reducing risk. Further, they may be remarkably lucrative for those who apply regimented management of your capital. If you've heard of the term hedging - then this community of commodities trading wont be as difficult to comprehend. If you are interested in learning more about trading futures, Let me go over 5 main reasons why a proficient investor should look into investing futures.
1. Extremely Liquid : unlike many common stocks, commodities contracts are extremely liquid. Which means you can get in and get out of any position rapidly since there are a great number of buyers and sellers out there. Which means that you can get in and get out and never have to worry about a huge spread, or more painful, be worried about slippage as you do in stocks.
2. Larger Profits - if you're accustomed to using margin to invest in stocks, you will then be pretty familiar with how futures contracts can offer considerable leverage. Many times, you can purchase a futures contract for only 10% of the actual underlying equity. When the underlying instrument goes 1% higher, your increase can be 10%. However, it also will work in the opposite direction - a 1% drop often times will be a 10% loss if you're totally leveraged. For anyone who is exercising proper risk management, efficient position sizing and have done your quest for the trend of the underlying position, you are able to utilize this increased leverage without blowing up your portfolio.
3. Leverage - as mentioned earlier, you can usually transfer 5-10% of the underlying position to buy a contract. Which means that the $10 000 can control over $100 000 worth of the underlying assets. For those who have $100 000, you may control over $1 000 000 of the instrument. This kind of leverage is the thing that be capable of turning a superb gain right into a large gain. Imagine, your $10 000 now controls $100 000 price of SPY - and SPY increased 2%. You've just made $2 000 - or 20% in your $10 000 account. On the other hand, if the position moves against you, you can easily lose $2 000 - or 20% of your overall position - just on the 2% move. For this reason disciplined risk management and position sizing is essential.
4. Earn money In a Market - with the markets moving strongly in both directions, there's lots of money to be made for the agile investor. With futures contracts, it is simple to range from long to short and to long again.
5. Paper Investment - not to be mistaken with paper trading. If you wanted to trade corn futures for example, its not necessary to worry about the particular commodity itself, while you only need to be worried about the paper itself. Donrrrt worry about storage or where you can keep cattle you just bought.
As you can see, there are many benefits for the seasoned investor. The most important secret is to take an organised risk management and position sizing approach. If your research points to some strong move in a particular direction, futures trading can present you with signifant returns.
Author Resource:-
To get more advice on penny stocks, stop by http://www.1source4stocks.com. Being a penny stock trader for the last 10 years, Paul has seen it all.
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