Futures are financial derivatives that get their value from an underlying market (stock indices or commodities) or asset class (such as individual currency pairs). E-mini futures are smaller versions of larger futures contracts, meaning that their total contract value and resulting dollar-per-tick may be much smaller than their larger counterparts.
E-mini futures are often used for short-term market speculation. When you trade futures, you are trading “risk” as opposed to trading a “share” of a company’s stock. Hence, the structure of e-mini futures may be more conducive to short-term trading than stocks.
Bear in mind that e-mini futures offer both opportunities and risks. So, if you are an experienced trader or investor who has the knowledge, experience, and financial means to handle both, then here are a few reasons why you might want to consider e-mini futures over stocks.
- Short-term speculators can make (or lose!) money faster. A trader or investor with good judgement may be able to benefit from the leverage that futures contracts offer. This is because futures provide 10 times more exposure than your average stock. Money moves very fast when using high leverage. This, of course, means you can lose money fast if you are not careful. So when trading futures, be sure you are using only risk capital, and that you have enough experience in the markets to handle the risks (and opportunities) that such a market has to offer.
- Certain E-Mini Futures May Offer Higher Liquidity Than Others. Let’s assume that traders are attracted to futures for the purposes of short-term trading, whether they trade intraday or hold positions for a short number of day. In this case, we can also assume that traders might prefer trading markets that have lots of buyers and sellers; contracts that are traded heavily throughout the day; instruments which can be traded at higher volumes without significantly impacting the price. This is called liquidity, and certain futures products, such as indices, tend to have higher levels of liquidity than others.
- Prices are Market-Driven, Efficient, and Generally More Transparent. When trading a futures contract, the prices that make up the bids and offers are driven by market participants and not by an intermediary determining the prices. This may not necessarily be the case for certain markets such as spot FX or forward contracts, in which an institutional liquidity provider or bank may determine the price of the instruments. In the futures market, the prices are market-determined, and hence may be more transparent and efficient than other asset classes that are not market-driven.
- Futures Prices May Be More “Fair” Than In Other Asset Classes. Extending the previous section price transparency, futures may present a more “fair” environment than the stock market. Unlike in the stock market, “insider trading” is not a common infraction in the futures market. It may be extremely difficult or next to impossible to get inside information on upcoming Fed decisions, energy or agriculture reports prior to their official release.
- Your Focus on a Broader Market Can Be Consolidated Into One Instrument. Don’t get us wrong, but there may be a lot of fundamental factors to consider when trading a broad market such as the S&P 500, Dow Jones Industrial Average, and NASDAQ 100. But compare having to focus on, say, the S&P 500 as an entire index vs following 10 or more individual stocks, each with its own set of fundamentals. Now, you may prefer to focus on market particulars rather than a general market. It’s up to you. But if you want to consolidate a broader market into one instrument, then perhaps a futures index might be one way to go.
- No pattern day-trading rules account balance requirement, or short selling limitations. According to SEC pattern day trading requirements, you will need to maintain $25,000 net liquidity in a stock account in order to day trade stocks. This is not the case in futures, where you are only required to maintain a sufficient amount of margin–determined by the exchange, FCM, or brokerage–to buy, sell, and sell short futures contracts up to several times per day.
- High leverage allows you to trade expensive contracts with only a fraction of the money. Futures are highly-leveraged instruments, meaning that you are putting down a small percentage of “earnest money” to borrow heavily from the FCM in order to buy or sell a futures contract. In other words, you are assuming the risk of (and full responsibility for) an expensive contract with only a fraction of the contracts entire value. Bear in mind that this can work for or against you; hence, leverage is often referred to as a “double-edged sword.” But with proper risk and money management, you might be able to take advantage of both the upside and downside of a leveraged instrument.
- You can diversify or hedge your stock positions. Let’s suppose you are highly invested in the stock market and need wider diversification. As certain commodity classes (e.g. energies, grains, livestock, etc.) may be less-correlated or uncorrelated to your stock positions, commodity futures may offer you a way to better diversify your securities portfolio. In other cases, say you are looking to hedge a correction in the stock market, you may be able to use futures to go short a market in which you are net long in stocks. If you have the knowledge and/or experience to implement these strategies, e-mini futures may give you the means to efficiently pull them off.
- Tax reporting can be easier compared to stocks. Active stock traders know that tax reporting can be a complicated mess. In some cases, you may be required to keep track of and report each stock you have traded. With futures, your tax reporting comes down to one lump sum of a capital gain or capital loss. No matter how many different markets you have traded, no matter how many times you have traded a given market, in the end, your reporting may be efficiently reduced to one figure.
- Transaction costs are highly competitive. The futures market is heavily comprised of short-term speculators. These speculators provide a huge bulk of the liquidity that makes certain markets more efficient. To adapt to the demand for frequent short-term speculation, commissions and transaction costs for futures trades tend to be very low, as compared with stocks. However, this also depends on the services–including data, platform, and transaction fees–provided by the broker, FCM, exchange, or any third-party provider that may be involved.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.