Despite its obvious advantages, most stock traders are woefully ignorant of the opportunities in the futures markets, writes Erich Senft of the Indicator Warehouse.
Okay, so you've heard of the futures markets, but if you're like most stock traders, you think that the futures markets are like some dangerous financial animal best avoided. You've heard the stories. You know; the one about the guy who knows the guy who wiped himself out trading futures?
Yes, it is possible to wipe yourself out trading futures, but not any more likely than doing the same thing in the stock market. Stock traders actually do themselves a disservice by not looking more closely at the futures markets. You see, futures are the ultimate investment vehicle. Huge rates of return, endless trading possibilities, and superb liquidity are only a few of the benefits of trading futures.
So if you’ve ever been curious about what makes futures better than stocks, read on to find out 11 things you may not have known about the futures markets.
1. Futures Are Less Volatile Than Stocks
What? That can’t be true, can it? Yes, it’s true. Unbeknownst to stock traders, the stock market is actually more volatile than the futures markets. Oh sure, there can be some “monster moves” in futures, known as limit moves, but dollar for dollar, the stock market presents greater risk in terms of market volatility.
2. Futures Trades Are Easier to Find
What do I mean by “easy”? I mean you don’t have to scan 40,000+ stocks in order to find a good market to trade. There are less than 50 major futures markets and but you don’t even need to watch all those. If you scan a dozen markets you’ll have more trades than you can take. I know professional traders that make a very good living watching only three markets.
3. Leverage Is Your Friend
No doubt the futures horror story you heard told you about the evils of leverage in futures. Unlike stocks, which you have to pay in full to trade, futures can be bought on margin. This means you only have to put up a deposit to control a much larger value of the particular commodity. This also means that your return on investment is huge when compared to returns on stocks.
4. Futures Can’t Be Manipulated
If leverage is the evil side of Futures, then stock manipulation is the skeleton in Wall Street’s closet. Of course, no one is going to manipulate the big Dow company stocks, but there are a lot of stocks that get “hyped” and overvalued only to leave the small investor holding the bag. This is virtually impossible to do in futures as futures represent real physical goods, which have an inherent real value.
5. Futures Are Cheaper to Trade
This stems back to leverage, but trading futures is a great way to get more bang for your buck. Imagine controlling $160,000 worth of gold for only $9,000 or how about $39,000 worth of corn for only $2,700? How is that possible? Well, the futures exchange only requires you to put up enough margin to control a contract, and once you control the contract, you only need to keep a lower maintenance amount in your account to keep control of the contract. By trading margin you are able to free up much of your valuable trading capital for other opportunities.
6. Futures Can Be Traded by the Small Spec Trader
Let’s face it; stocks can be expensive to trade. Yes, I know there are penny stocks, but trading those can be a bit like tip-toeing through a mine field. But in futures there are literally markets for every budget—and all with good liquidity. Don’t have a lot of money to trade? Try trading canola or maybe the 5-year note. Got lots of money to trade? Great, look at crude oil, and maybe coffee, to really get into some big profit markets.
NEXT PAGE: 5 More Reasons to Trade Futures
|pagebreak|7. Futures will Never Go Bust
Remember Enron? How about Bre-X? Unlike stocks, futures are based and real live physical goods and as a result they will always have value; therefore they will never ever trade to zero. Sure price might go down, but rest assured that the underlying futures contract will never become worthless.
8. Futures Offer Better Diversification
Many stock traders try to lower the risk to their overall account by diversifying investments across various industries. This is a good strategy; however the problem with limiting your diversification to the stock market is that almost all stocks tend to move in the same direction, regardless of their sector.
For example, if the S&P is climbing then almost all stocks appreciate but if the S&P is falling, then almost all stocks lose some of their value. Futures are only somewhat affected by the state of the economy. By and large they follow their own cycle. This is because futures represent physical goods. Corn, wheat, soybeans are planted the same time every year, harvested at the same time every year, go to market the same time every year, etc., regardless of what is happening in the stock market. This kind of diversification can add lot of stability to your account.
9. There Are More Opportunities in Trading Futures
Most stock traders only look to buy stock in hopes that it will trade higher. Have you ever tried to sell a stock? Pain in the butt, isn’t it? Yet in the futures world, it is just as easy to sell a market as it is to buy it. This means you can make money whether prices are going up or down. Now you can not only “buy low and sell high” but you can “sell high and buy low” as well.
10. You Never Own a Futures Contract
Unlike a stock, where you have to shell out cash and actually buy stock in the company you’re trading, in futures you are contracting for a commodity. In futures you contract to buy or sell at a specific price and look for opportunity to “offset” your contract at a better price and profit from the difference. If you can’t wrap your head around it, think Wal-Mart: you buy something at one price and try to sell it for another. Same idea, but it’s all contractual.
11. Super Liquidity
Granted some of the really big stocks like Apple (AAPL), Caterpillar (CAT), and Hewlett Packard (HPQ) can post volume of 100k shares on big trading days, but even these are no match for an average day in most futures markets. The Eurodollar, for example, routinely trades 150k contracts a day. A “bad” day in crude still posts over 300k trades. And even an old stand-by like wheat will post over 100k trades a day.
So what does this mean for you? It means that futures are ultra-liquid markets. You’ll never have to worry about getting a fill on your entry or exit, no matter how big your position might be. And that’s important if you’re looking to get into, or out of, a trade in a hurry.
So there you have it, 11 advantages that futures have over stocks. Yet in spite of these obvious advantages most stock traders are woefully ignorant of the opportunities in the futures markets. One thing I can tell you for certain: once you begin exploring the opportunities in the futures markets, come to understand how easy and profitable they can be to trade, you’ll wonder why you never considered trading them sooner!
By Erich Senft of Indicator Warehouse
