Futures trading got some mainstream attention with the success of the 1983 big-screen comedy “Trading Places,” with co-stars Dan Akroyd and Eddie Murphy trading on frozen orange juice futures. The strategy behind real-life futures trading is quite a bit more complex, but for growth-oriented investors, there is value to be found.
What is futures trading?
Futures trading gained momentum in the 1970s with the expansion of futures trading markets like the Chicago Mercantile Exchange (CME) and New York Mercantile Exchange (NYMEX). Beginning with the establishment of a futures contract, the strategy is an agreement to buy or sell physical commodities or other assets at a specified price on a specified date. Futures traders are looking to profit on the price movement of the commodity or asset that underlies the contract. The contract is then standardized and traded on various exchanges. Contracts are generally settled in cash, but in some cases the settlement can be the delivery of a physical commodity.
Futures contracts provide access to a range of possibilities, from agriculture and livestock, to precious metals and other commodities and financial instruments, including stock indices, foreign exchanges and Treasuries.
Why invest in futures?
• Diversification & Flexibility. Futures trading can diversify an individual’s retirement portfolio giving them greater flexibility and investment strategies beyond the stock market.
• Tax Advantages. Investors can choose to trade futures through a self-directed IRA (SDIRA). This option can provide tax-deferred or tax-free advantages on any trading profits.
• Low Correlation. In a time of great stock market volatility, investors can gain peace of mind knowing futures generally have a low correlation to traditional investments in stocks and bonds.
While there are several key benefits of futures trading, particularly when traded through an SDIRA, there are certainly several risk factors to consider. As with any investment, investors would be wise to do their homework and ensure they understand the details and obligations of the futures contract and how the trade will be settled.
Disclaimer: The information provided herein does not, and is not intended to, constitute personalized financial or legal advice. The contents of the article are for general informational purposes only and should not be relied or acted upon without specific professional legal or financial advice, based upon an individual’s situation.