The futures market ends to be popular among investors for a number of reasons. It is possible to protect the prices of specific assets, and it can be used by the investor of a more speculative nature. If you’re considering a move into the futures market or perhaps are already invested (no pun) these tips may point you in the right direction.
Please note, these futures trading tips should not be considered financial advice and any contract entered into on your part, should be proceeded by in depth research into the asset to ascertain its investment potential.
Futures Trading Tips
1 – Research the Asset
Research is key to any investment and it is important you perform due diligence on any contract that interests you. If you consider that futures contracts often involve physical assets such as food grains, oil, and gas, getting a feel for the market is often a case of staying up to date on market news, and researching the asset itself.
Traders spend large parts of their day conducting this research to make sure their investments are sound.
Always include political events and policies, and look at the policies of global organizations such as the United Nations. In today’s world, countries implement policies that are passed down from global organizations.
2 – Understand Margin Risk
It is imperative that as a futures trader, you understand margin and leverage in relation to futures trading. When you open a position in a futures contract you do so via a licensed broker. The fee to open the position is the margin and the total value of the contract minus the margin is the leverage. Should the contract lose value, the broker will ask you to pay a maintenance margin fee which corresponds to the amount of contract value lost.
The strength is that you can open a position for a small amount of margin. The weakness is that you are exposed at least potentially to considerable risk.
As such, it is very wise to be prepared for the maintenance margin eventuality and have funds set aside for it.
3 – Inflation
Inflation at the moment is the highest it has been for decades. This does not seem to be changing any time soon and as such investor sentiment is more on the cautious side. Inflation also puts markets and businesses under considerable pressure which in turn should factor into your research into underlying assets.
Inflation is such an important factor in the futures market that there is a type of futures market to hedge against it: Inflation Rate Futures.
The crippling effects of high inflation should never be discounted in regard to the markets and wider world.
4 – World Events
World events are another factor where futures market investing is concerned. Again, research into an underlying asset is invaluable here. For example, lithium which is essential to battery production used in electric cars and electronic devices such as laptops and cell phones currently has a bullish sentiment as countries implement the United Nations 2030 policy.
It is events like this and other aspects that speculative futures traders try to keep abreast of to make more precise and more profitable investment decisions. And so should you.
It is worth noting that world events also include natural disasters. This can affect the price of assets such as food grains and oil, for example, so you may want to take advantage of opportunities that arise from such events.
5 – Use Futures Contracts to Protect Your Portfolio
One use of stock futures is to protect your investments. Through entering into a futures contract you can agree to sell your stocks at a certain price on a specific date. This protects the value of your investments and is highly useful if you have a heavy investment in a certain stock or stocks.
It also protects your peace of mind knowing that no matter what is happening with the markets you are guaranteed a certain price.
6 – Use Futures to Gain Access to Markets
One advantage to using futures is that you gain access to assets and markets that the equities market cannot cater to. For example, you can gain access to commodity assets directly rather than secondary via stocks and some commodity assets can only be accessed via the futures market.
Arguably, you also have more hedging options to mitigate risk in the futures market.
7 – Realize the Tax Benefits
In most jurisdictions, futures are treated better for tax purposes which are taxed around 60% capital gains / 40% income tax. When compared to shares which are taxed as 100% income tax for the first year, you can see the difference is eye watering. Check this out in your own country to avoid disappointment.
Hopefully, these futures trading tips will help you make the most of the futures markets and help you achieve your aims. Best of luck to you.
