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Why Trade Futures and Options?
Sectors: Learning the Ropes
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Some of the features that make futures and options appealing investments include leverage, diversification, opportunity, liquidity and price availability.commodity futures broker, futures trader, commodities futures trading, financial and commodity futures markets, paper trading, full service broker assisted accounts.
Leverage
Futures and options have a unique feature that make them a more attractive instrument from a trading perspective than stocks, bonds, real estate and even hockey cards, and that is high leverage. Leverage is a measure of the worth or value of an investment relative to the money required to buy (or sell) the investment. For example, if you need to pay the full value of an asset when you buy it, then there is no leverage. On the other hand, if you only need to put up a small fraction of the value of an asset in order to buy it, then leverage is high. Futures are highly leveraged assets since you only need to put a little money down, referred to as margin, to control a lot of futures value. Margin requirements for various futures contracts can be found on the World Link Futures web site. Typically, a futures contract can be bought or sold with a margin of 2% to 20% of the value of the contract - and that gives you a lot of leverage. For instance, initial margin on one Deutschemark currency futures contract valued at $78,000 may only be $2,500, or 3.2% of the value of the futures contract. Remember that, with futures, the money or margin required to buy or sell a contract is not a cost but just a "goodwill" performance bond - you get this money back when you close your futures position, plus any gain or minus any loss on the futures position itself. The high degree of leverage allows you to trade a lot of value for little cash and this, in turn, enables you to earn a great deal of money or lose a great deal of money often in a short space of time.
For example, an investor buys one Deutschemark currency futures at $0.6245 and deposits the required margin of $2,500. Three days later, Deutschemark futures have rallied and the investor sells his futures contract at $0.6365. The profit on the futures position is $1,500 which represents a return of 60% on the margin deposit. Even though the Deutchemark futures itself only rose by 2%, the percentage gain on the trade is substantially higher because of leverage.
Leverage is a two-edged sword. A great amount of money can be made in a short period of time, and a great amount of money can be lost in a short period of time. Consequently, leverage makes investing in futures risky.
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