Let’s say you had a pretty good idea that if you bought 10 jars of pickles you’d make a lot of money, because from what you have been reading the demand for pickles was going up in the future. You pay fifty cents a jar, stash the jars in your pantry and sure enough — the price of pickles doubles and you make a $5.00 profit.
But, supposing you are required to have 100 jars minimum to trade. What are you going to do? The answer is to find somebody that has 90 jars and “go in on the trade” with them. Both of you share in the profit when the jars are sold. This is gives you the “leverage” you need to sell pickles in a market you could not have entered otherwise.
But let’s go further. Let’s say that jars of pickles are not physically being bought or sold. Your friend draws up a contract offering 100 jars of pickles at the going rate…and THIS is what is up for sale.
1) Leveraged Contracts
You now have a Futures commodity contract, and you can begin to see the advantages that Futures trading offers. They are highly “leveraged” investments; in order to invest in a contract you only need to buy a small fraction of it’s value, usually only about ten percent of the contract’s total worth. With this, you can trade huge amounts of commodities.
If you predict the movement of the price of the commodities traded correctly, you’ve got the chance of a ten fold profit on an initial investment of ten percent of the actual Futures contract’s value. Leverage will work to a tremendous advantage to the investor in Futures trading.
2) A Paper Investment
Up until now, we’ve assumed you still own 10 jars of pickles. But let’s say you don’t have storage space for 10 pickle jars or your landlady is a “pickle-phobe” who says you can’t have more than two jars on the premises. With Futures contracts you don’t need to physically buy and store them…you instead buy the contract. You now have what’s known as a “Paper Investment”. The Advantage of a Paper Investment is that the investor doesn’t have to store or manage the commodities being traded…it’s all done on paper.
3) Liquidity of Futures Contracts
There are huge numbers of contracts traded on the market on a daily basis, with a large number of buyers and sellers placing orders very quickly, no matter what the commodity is. This is known as “liquidity”. Contracts can be bought and sold with ease, and your contract can be easily sold at any time…the trick being (of course) to sell “high” rather than “low”.
4) Fairer Trading
The Futures trading market is a fairer trading situation as compared with stock stock trading and share trading. It is more difficult to get insider information on Futures which is a problem in price manipulation of stocks.
5) Lower Commissions
Commissions on Futures markets tend to be smaller, and they are usually paid after the position has ended. Depending on the level of service, brokers’ commissions are sometimes as low as five dollars to as high as two hundred dollars per transaction.
6) Quicker Profits
Futures trading may offer the investor a quicker way to make a profit. As a general rule, Futures markets move faster than the cash markets, but this can also pose more risk. There are quick gains, and quick losses. Incorrect predictions of commodities positions can take you down fast…correct ones can take you up…just as fast.
It all depends on your ability to predict…and that to a great extent on good sources futures of knowledge of commodities and how they are expected to perform.