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The letter will come from a 20-year trading professional named Ian Cooper. He says, “In 2017, following my trades you would be doubling even tripling your account some months. Let me show you how.”
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Stocks and the stock market can also be traded in futures and options on the futures market. Trading in stock index futures goes back to 1982 and has evolved into one of the most successful electronically traded markets with contracts based on the S&P 500 Index, Dow Jones Industrial Average, Nasdaq-100, and Russell indexes.
The first things many people associate with futures are leverage and risk, but after the technology of the stock bubble of the late 1990’s, the accounting scandals and fraudulent dealings at Enron, Worldcom, and other companies, and the bankruptcies and forced mergers in the banking, insurance, and housing industries, futures may look a lot less risky than many stocks. Like most investments, futures do have some inherent risk, but they can also actually reduce some of the risks that exist in the investment world. And for the active trader, futures offer one of the best ways to get big returns quickly while helping you keep your risk under control.
So what do you need to know about a futures contract? Here are the key points.
Temporary Replacement for a Future Transaction: A futures contract is an agreement today to meet the terms and obligations of a contract that matures at a specific date in the future. When you buy futures, you do not “own” anything as you do with stocks or bonds, but you gain the right to benefit from price appreciation. If you hold a long physical commodity futures contract until expiration, you may take delivery and own the actual commodity, but that is not a part of the practical trading strategy.
If you sell futures, you do not borrow shares as you do with stocks but you have the right to benefit from price depreciation. If you hold a short physical commodity futures contract until expiration, you are required to deliver the commodity to the buyer under terms specified by the contract, but that also is not part of our trading plan.
You are only speculating on a change in prices, hopefully in the direction of your position.
Standardized Contracts: In many other transactions, specifications can be tailored to fit the needs of both parties, and the contract may be one of a kind. In futures, one contract is the same as any other futures contract for the same market, same month, same size and same exchange. Contracts are interchangeable or fungible. The one thing in a futures contract that is not standardized and regulated is the price at which the transaction takes place.
Exchange-Traded, Centrally Cleared: Futures contracts have two key characteristics: (1) They must be traded at a centralized marketplace – an open-outcry or electronic exchange – where all bids and offers come together and are matched in trading conducted by specific rules under the oversight of government regulators, and (2) the terms of the contract are guaranteed by a centralized clearinghouse so you never have to be concerned about a default on a contract. The exchange’s clearing agency takes the opposite side of every futures transaction and resolves any potential disputes.
Time Element: Futures have an expiration date, usually a relatively short time into the future for the most active contract months. There is no buy-and-hold in futures because when the contract expires, it is settled according to the terms specified and goes off the board. Therefore, in addition to price direction, futures traders also have to consider the time frame within which they expect a price move to occur.
Performance Bonds: “Margin money” does not mean the same thing in the futures market as it does in the equities market. The futures contract does not involve a down payment for future delivery as is the case in stocks. Instead, futures involve a “good-faith deposit” or a “performance bond” that confirms your willingness to fulfill the terms of the contract. It’s like earnest money in an escrow account and is required for both the buyer and seller of a futures contract.
Exchanges set the minimum performance bonds for each futures contract, and these amounts change as market conditions change. Typically, the amount is only 3% - 10% of the value of the contract, but the amount could be greater in volatile market conditions.
Why Futures Exist
Futures are important tools in the business world for several legitimate purposes:
Price Discovery: Futures trading provides the means to determine market value in a centralized marketplace that brings together all the “bid” and “ask” (or “offer”) prices to arrive at a value agreed upon by both the buyer and seller. Like any other auction market, traders bid on an item for sale and discover what other people think it is worth in a competitive setting. Bids and offers come from a variety of sources with a variety of motives for being involved in the market. By centralizing all buying and selling activity with the largest possible pool for participants, the market determines value at that particular moment in time.
The price established at the exchange for a commodity is often the price quoted around the world and is the basis of much physical trading.
Risk Transfer: Other than price discovery, perhaps the most useful purpose of futures is to transfer risk from someone who has it to someone who is willing to assume it. Those bearing the risk of price change – producers or end-users of a commodity or owners of stocks in a stock index, for example – may use futures to pass that risk along to someone who thinks the market will provide them with a profit for their willingness to take the risk (speculators).
All markets carry a risk for someone, whether the prices go up or down. Futures produce no new risk but just shift the risk that does exist in a transaction where both parties hope to benefit from a price movement in their direction.
PLEASE READ: Auto-trading, or any broker or advisor-directed type of trading, is not supported or endorsed by TradeWins. For additional information on auto-trading, you may visit the SEC’s website: All About Auto-Trading, TradeWins does not recommend or refer subscribers to broker-dealers. You should perform your own due diligence with respect to satisfactory broker-dealers and whether to open a brokerage account. You should always consult with your own professional advisers regarding equities and options on equities trading.
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