Trading Futures in a Stock Market

When you invest in a stock market, it is important that being an investor, you should create a portfolio of different investments, such as stocks, mutual funds and bonds. But investing in these products is not enough because the financial market is subject to frequent fluctuation and you never know when your profit turns into a loss. These are the reasons why investor’s portfolio is always subject to risk of financial loss. In order to hedge the risk associated with securities, derivatives have been introduced.

One of the most popular derivatives in a stock market is Stock Futures. Futures are financial instruments that hedge the risk of underlying securities, such as stocks. They are speculative in nature and are highly leveraged instruments. If an aggressive investor does not carefully trade in futures, they can suffer heavy losses in stock market investments. But despite the above mentioned facts, these derivatives help investors to diversify their portfolio by hedging against losses in a volatile stock market.

Global currencies, treasury bonds, stocks, commodities and even the weather are among the type of investments that are tied up with futures. It takes a high level of sophistication to trade in stock futures, and this is the reason financial institutions, wealthy investors, trading firms and hedge funds trade in futures. Being a stock market investor, if you are planning to invest in futures, it is important that you consult Your Personal Financial Mentor because he has a great stock market exposure and is always aware of fluctuating trends. It is only wise to take an expert’s advice in order to make a profitable investment in the long run and safeguard your investment against the risk of financial loss.

Futures offers a great way to earn profit from short term price movements and trends, both upward and downward, without owning the underlying asset, such as stocks or bonds. It gives you a right to buy a certain financial instrument at a future date and in return, you agree to keep that promise.

However, there are certain factors that you need to consider when you invest in stock futures and these are as follows:

Insufficient Capital – You should at least have $ 25000 if you want to invest in the futures trading account and $50,000 would be even better if you are supposed to meet the margin requirements.

Pressure imposed by costly commissions, brokers & pitches – Do not be tempted by high-pressure brokers, costly commissions and pitches. You should rather run instead of just walking away if a future trading strategy, defined by a broker, sounds too good to  be true.

Lock limits – There is a lock limit imposed by stock market when you are trading in futures. It restricts your moves to contain volatility and avoid one-day collapses. A futures contract is essentially frozen if prices have lost or gained on a daily limit. This situation is known as a ‘lock limit’ market.

Thinly traded stock market – Stock market where stock futures are actively traded enjoys greater liquidity. It allows investors to trade quickly and at a better price.

Categories: Stock Market

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November 2, 2013 Trading Futures in a Stock Market