Why futures trading is an excellent investment option
Looking for an investment opportunity? Find out what futures trading is, and whether it could be right for you.
Having a healthy investment portfolio is essential for building wealth. If you are just beginning your investment journey, you may be overwhelmed by the numerous markets and asset classes you can invest in. It can also be challenging to know which types of investments are right for you.
That said, futures trading is often recommended for beginners because it offers a healthy mix of features and benefits you cannot find in other investment options. Let us look at them so you can see why it is an excellent option for helping you build a healthy investment portfolio.
What are futures?
Before we dive into their benefits, you should understand what futures are. They are derivative contract agreements where an investor agrees to sell or buy a specific commodity, asset, or security at a future date. Instead of trading in stocks, you trade in their speculative price in the future.
Futures allow you to profit by predicting the price movement of an investment option. You can enter an agreement to sell a contract in the future for a price higher than what the asset is worth today and pocket the difference.
Futures trading allows you to trade with increased leverage
Leverage allows a trader to control a large investment position with only a small amount. Establishing a margin in other types of investments requires you to put up at least 50% of the position you would like to buy.
With options trading, you can put down less than 5% of the contract value and get leverage for the rest. An experienced futures trader can advise you on the best level of leverage to take for the type of investment you are interested in and the amount of risk you are willing to take on.
As professional traders know, leverage is two-sided, so you should use it with caution. On one hand, leverage increases your profits greatly because you will be buying a larger position with a small amount. On the other hand, it can amplify losses for the same reason.
This is why you must have a risk management plan in place or seek the advice of a qualified and experienced professional.
Find round-the-clock opportunities
Another benefit of futures trading is that you get numerous opportunities to invest in them at any time of day. Most markets allow you to make moves according to market conditions, economic events, and your analysis at almost any time and for six days a week.
Some markets also allow foreign investors, so you can find opportunities around the world even when your local markets are closed.
Futures can help you diversify your portfolio
Portfolio diversification is crucial because it protects you in case one sector or market underperforms. It helps you leverage different rates of returns in different markets without taking all the risk by investing in each one singly.
If you think one type of investment already in your portfolio will underperform, and your analysis shows you this, you can buy futures instead of stocks. You know market sentiment and downturns are usually short-term and that the price will bounce back.
It might even bounce such that you profit more by speculating on the future price than you would if you just bought the shares. Remember, you can amplify these profits using leverage, but always keep the risks in mind.
Futures trading comes with potential tax savings
You can also take advantage of the tax benefits of futures trading through the 60/40 rule. The gains from futures trading are divided into short-term gains and long-term gains.
The 60/40 rules state that 60% of your futures will be taxed as long-term gains, regardless of how long you hold them. 40% will be taxed as short-term gains and like regular income.
Remember that tax laws change regularly, so you should always talk to an accountant or tax advisor to better understand what applies to you and learn how to leverage these tax advantages.
Start with as little or as much as you wish
Participating in the futures market is open to everyone because of the choice of contract sizes. For example, you can start with micro futures that allow you to start with little capital and lower risk.
The different contract sizes also allow you to scale your investments up and down as you wish.
Could futures trading be for you?
Futures trading is an excellent option for different types of traders, regardless of their investment capital. They also have numerous benefits over other types of investments, a notable one being their tax advantages and the ability to find opportunities at almost any time.