Before I can discuss the benefits and drawbacks of trading future net worth it is important to understand the differences between trading stocks and trading future net worth.
You own a part of the company when you purchase stock. This means that you can share ownership with other investors. This is why we recommend that you purchase shares.
future net worth trading requires the purchase or sale of a commodity in the future. They are futures.
These future net worth contracts can be traded just like stocks. You don’t even need to put down the money. Margin is a way to tie up resources.
Problem is, the margin is not close to the actual commodity’s value if you were going to buy it. This is called the Notional Valuation. It is the market price multiplied with the leverage.
Ok, now I’ll just throw you two additional terms that require definition.
The market price refers to the amount that traders will pay. This is generally determined by supply/demand. The leverage refers to the number of future index units.
The leverage for the E-Mini SP& 500 future net worth is 50. It’s currently trading at a close to 2100 market value as of the time of writing. Multiply this by 50 leverage points and you get $105,000. This is the Notional Valuation of the E-Mini S&P.
You can see that a single E-Mini S&P contract will give you $105,000 worth of value. But unlike stocks, it is not yours. It is only possible to purchase or sell it through a contract, depending on whether you were long or short.
Low Margin
What was the actual amount you paid? This is the broker’s margin you must keep while the trade is active. It can vary, but it is usually around $5,000.
A stock worth $105,000 would require you to pay $105,000 to buy it. You would have to pay half the amount if you used margin. Futures have the advantage of only tying up a small portion.
The downside is that you must be knowledgeable about what you are doing. You could lose a lot of money if you allow a Futures trade to slip by you. It’s a contract.
This is why Futures traders can buy and sell futures contracts, without ever actually buying the commodity.
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What’s the downside?
You must be thorough in determining the actual value of future contracts when trading futures.
If you fail to pay attention the Notional Value and trades keep going against you, you can lose a lot of money.
In a very short period of time, you could lose a lot of money. Your broker will close your trade if your margin exceeds the limit. This means that you have been removed from the market and may not be able to return. It’s over!
You should keep your costs low. Do not add to poor trades in the hope of lowering your cost base. Instead, admit you were wrong and then you will be available to play again when the opportunity presents itself.
Advantages?
These are just a few of the many reasons I prefer futures to stocks. This article will briefly discuss the benefits of trading futures.
Trading Long and Brief
It’s just as simple to go short with future net worth as it is to go long. It is as simple as deciding which direction you believe the market will go.
No Day Trading Limits
future net worth have no limit on the number of trades per day. The IRS will consider you a day trader if stocks are traded more than three times per day. Futures can be purchased and sold at any time during the day. This allows one to make quick profits and take advantage of intraday swings.
No Wash Sales Penalties
You are not subject to IRS penalties for taking a loss but reentering the trade within 30 days. If you do this with stocks, it is considered a loss and you cannot deduct the loss. However, you can carry the gain forward to another stock.
Futures pricing is not penalized because they are marked as Market-Marked. This is too technical for me to discuss. If you are interested, you can do a Google search.
Trading 24 Hours
future net worth trade almost every hour of the day, with the exception of weekends and brief periods between to keep exchange records.
European Style Trading
Stock options follow the American Style and can be exercised at any time. Stock options can be traded, but it is important to not exercise an option that is out of the money.
future net worth Options are traded in European Style. They can’t be exercised prior to expiration. Some exceptions apply, particularly for weeklies. This is beyond the scope of this article.
Tax Advantage
IRS Section 1256 applies to future and options on futures. This gives you a tax advantage as 60% of gains are considered long-term. Even if you only hold it for a few seconds, this is still true.