Online Future Trading

Written by Erin Jones
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The futures market, once reserved for the ultra wealthy and big institutions, is now accessible to most retail investors. The two variables that have led to the affordability of futures are software and contract sizes. An essential part of trading futures is having adequate software to simplify the rapid movements of futures trading. Since the cost of technology has fallen to fair prices for everyone, sophisticated programs are cheap enough for retail investors to purchase and use. Additionally, the prices of futures contracts have reached levels that are within the budgets of most investors.

Most of the appeal surrounding the futures market is leverage. Many investors are familiar with traditional leveraging in the stock market through the use of margin. Margin allows investors to borrow money at relatively low interest rates to buy more equity. The equity markets limit the amount you can borrow to the total value of your portfolio, thereby doubling your buying power.

Learning to Trade Futures

The leverage in the futures markets is as high as 30 times greater than the levels offered in the traditional markets. The prospect of earning great profits with little money down has attracted a new kind of investor to the futures market. Retail investors who have been discouraged by equity and are willing to take on a significantly greater amount of risk have been flocking to the futures market.

The risks associated with the futures market are similar to those found in many other financial markets. The greater exposure achieved through levering, however, can cause large losses. Savvy investors can limit their risk by employing hedging techniques. Hedging has become popularized through accredited investors switching from traditional money managers to hedge funds.

Most retail investors believe that hedging is risky. The truth is, however, that hedging simply means to buy something that will go up when another investment goes down. Therefore, basic hedging actually lowers your portfolio's total risk. Most professional investors have used some form of hedging by simply concentrating most of their investments in two different sectors. The healthcare and technology sectors can serve as an example. If the market declines, consumers will still purchase their heart medications and will likely forego buying a new computer. Ultimately, healthcare will act as a hedge for technology, so as technology declines with the general market, the healthcare sector will likely rise or remain stable.

Hedging with Futures

Futures are great tools for investors to either use greater leverage for higher profits or to lower their overall risk. Many professionals spend most of their time teaching hedging techniques to the ultra wealthy, simply because they pay more. The Internet, however, allows smaller investors to take professional, quality hedging courses for reasonable prices. Before stepping into the futures market, taking an online course is critical.

The basic idea of futures originates in the commodities markets. A futures contract is simply an agreement by one party to deliver a good for a given price on a future date. Most futures contracts are rarely held until maturity because most futures investors are speculators. In other words, an investor buying a futures contract for sugar does not actually want 11,000 pounds of sugar showing up at his doorstep, so he will sell the contract prior to maturity. Most futures contracts are settled for cash.

Within the last decade, financial institutions have created futures contracts for index and individual stock investing. Investors now have the opportunity to use the futures market for hedging against concentrated equity portfolios. Retail investors should take the time to fully understand all areas of the futures market and perhaps go through some structured training before investing.


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