Five reasons why traders use futures

E*TRADE Futures


Have you ever wondered if trading futures is right for you? Let’s look at some reasons why investors trade futures and how they might fit into your trading strategy.

1. Speculation

This is a simple one: like many other investments, futures let you speculate on the future value of an asset. Futures are available for a variety of different assets, including crude oil, currencies, equity indexes, and precious metals.

When you buy an asset as an investment, you’re speculating that the price of the asset will increase over time. Futures are an alternative way to do the same thing without actually buying the asset itself. But futures can also be used to speculate that the price of an asset will decline, which brings us to reason #2.

2. It's easy to "go short"

If you’re aiming to profit when an asset’s price falls — i.e. if you’re short-selling — the requirements related to doing this with stocks can be complex, but that’s not true in the futures markets. In futures, you take a short position by selling a futures contract, which is just as easy as buying one and can be done any time you choose.

3. Hedging risk

Futures provide opportunities for hedging (i.e. reducing) risk. For example, if you own a broad market portfolio of stocks, you may be exposed to significant risk if stock prices drop. You can hedge against these potential losses by selling equity index futures, helping to offset your equities losses.

4. Extended market access

Futures are available to trade 24 hours a day, 6 days a week. Events that could impact the markets may take place when the stock market is closed. Futures, on the other hand, could give you the ability to act on information immediately, rather than waiting for markets to reopen.

5. Leverage

Futures provide leverage, meaning you can control a large contract value with a relatively small amount of capital and use less money to gain exposure to price movements in the markets.

Trading futures can be an efficient and relatively simple way to seek profits or reduce risk in the markets. You may want to consider how these characteristics could fit into your trading and investing plan.

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What to read next...

The idea of “speculation” may sound reckless and risky, something reserved for riverboat gamblers and oil barons. But when you think about it, speculation in one form or another is everywhere. Read on to learn more.

As we all know, financial markets can be volatile. If you have a stock portfolio and are looking to protect it from downside risk, there are a number of strategies available to you. But here’s one you may not have considered: Hedging your risk with equity index futures.

What is settlement? Depending on the needs of the traders and the product being traded, it could mean something different.

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