Futures contracts are an investment vehicle you can use to speculate on the price of a particular commodity or financial instrument at a specific date in the future.
Producers and end users employ futures as a way to protect – or hedge – against price changes, transferring their risk to speculators.
And speculators are willing to take on the risk as they look to profit from changes in the market.
There are several key reasons individual investors are drawn to speculate with futures that may prove useful in your trading strategy.
First, the most actively traded futures contracts are highly liquid. They are generally very deep with narrow bid-ask spreads, meaning you can easily get into and out of your positions.
Another advantage of futures is leverage. You only have to put up a small percentage of the value of the underlying asset to control the position.
Leverage enhances price changes and can offer the opportunity for large gains. But if the price turns against you, leverage can lead to substantial losses.
Taxation is another benefit of futures.
There's the potential for a favorable tax treatment because futures are taxed at a 60/40 blend of long- and short-term gains, regardless of how long you hold the position.
But you should always consult your tax advisor before trading futures.
Also, futures offer trading 24 hours a day during week.
That means that you can look for opportunities, or take a defensive position, around the clock.
Finally, futures are extremely diverse. They provide exposure to a wide variety of commodities and financial markets.
And they can be a pure play; focusing on one market, and more closely tracking the price movement of the underlying asset.
This level of diversity provides you the opportunity to trade products that are not necessarily correlated to a stocks and bonds portfolio.
As powerful as these reasons are, keep in mind that futures trading involves the potential for unlimited loss.
To find out more, check out the next video on the range of assets you can trade using futures.