Options trading advantages disadvantages
Futures trading can appear to be a quite attractive investment option. Many investors have made a fortune with futures trading, including John Henry, the principal owner of the Boston Red Sox baseball team. However, others have lost large sums of money, enduring the disadvantages of futures trading. The primary disadvantage is quite evident: The word "futures" says it all. You have limited or no control over many factors involved in futures investment contracts. Crops are popular choices. Corn, wheat and soybeans are common options for futures contracts. Oranges and orange juice are equally popular options. Natural resource futures, such advantages natural gas, oil, gasoline and options, are also popular trading choices. Foreign currency trading, often shortened to Forex, has significantly grown in popularity during the new millennium. You could even invest in various interest rates, hoping that these rates will rise in the future. The overriding disadvantage of futures trading is the lack of control over future events. For example, you've invested in orange juice futures. But Florida suffers a devastating freeze, killing off one-half of the orange crop. While supply and demand theory suggests the price will increase, the lack of supply can also result in massive losses. Weather disasters, over which you have no control, can wipe out all types of crops. You face similar risks with foreign currency futures, as various factors, all beyond your control, such as political issues or country borrowing defaults, could devalue a country's currency. Along with the obvious risks, such as weather disasters, added risk comes with the complexity of futures contracts. Investors who do not fully understand these complexities can lose substantial money. You must decide if you have the time and inclination to follow national and international weather, political and financial conditions on a regular schedule. New investors must also find experienced professionals registered with the Commodity Futures Trading Commission, as typically licensed stock brokers cannot trade futures contracts. The leverage offered by futures contracts is both an advantage and a disadvantage. You can buy futures contracts for only 5 percent or 10 percent of a contract's value. The disadvantage involves the sometimes fast movement of futures prices. Contract prices can tick up or down daily, sometimes within minutes. If lady luck is not smiling on you on a given day, you'll receive a margin call from your broker advising you that your margin account has dropped below minimum levels, meaning you must transfer more cash to your account immediately. Futures contracts come with definite expiration dates. Even if you have trading fixed prices for the assets in the contract, as the expiration date approaches those prices can become much less attractive to others. At times, this condition can cause futures contracts to expire as worthless investments. Similar to banks that offer too options loans at fixed rates, changes in the market increase the risk that some of their loans will come with well-below market rates. Futures contract expiration dates, as they get closer, come with similar risks. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment trading independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above. Skip to main content. More Articles How Do Stock Index Futures Work? Can There Be Futures on Individual Stocks? What Is an Intercommodity Spread? Advantages Is Needed to Day-trade? The Costs and Benefits of Organized Futures Advantages Stock Delisting Process. Popular Futures Choices Disadvantages are popular choices. Controlling Future Events The overriding disadvantage of futures trading is the lack of control over future events. Complex Issues for Newer Investors Along with trading obvious risks, such as weather disasters, added risk comes with the complexity of futures contracts. Leverage Issues The leverage offered by futures contracts is both an advantage and a disadvantage. Timing Issues Futures contracts come with definite expiration dates. References 3 Futures Trading Academy: Disadvantage of Futures Trading Money Sitter: Why Investors Use Futures. Recommended Articles How to Stop a Loss on a Long-Term Futures Contract The Advantages of Trading Options vs. Futures The Tax Implications of Trading Futures When Are Dow Futures Posted Over the Weekend? Related Articles Are Treasury Bills Safer Than Mutual Funds? How to Open an Account to Futures Trade Influences of Program Trading on disadvantages Stock Market How to Trade Equity Futures What Is the Difference Between an E-mini and a Mini Forex Trading Account? Money Sense E-newsletter Each options, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. Editor's Picks How to Make Money Trading Futures How to Buy and Sell Energy Futures What Is the Dow Futures? What Is RSI in the Stock Market? How to Plan Trading Objectives in Futures Trading. Trending Topics Latest Most Popular More Commentary. Quick Links Services Account Types Premium Services Zacks Rank Research Personal Finance Commentary Education. 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Although there are many times that Groupthink leads to failure, there are few instances when it works for the food.