Earlier, we discussed what attracts traders to the futures market, and we also touched on some of the risks. Let’s explore some extra benefits and risks of futures trading.

As we’ve mentioned, many traders are drawn to futures because of leverage. Leverage means that a relatively small amount of capital can set up a position in a larger investment. It’s important to remember that leverage can be both a help and a risk. It frees up capital but can also increase risk. Small changes in the underlying futures price can translate into large gains or losses. And traders lose more than their original investment.
 

Futures can also offer a pure market view—where the price of a futures contract is determined by market forces. When you trade oil in the futures market, you deal directly with the price of oil. You also experience the effects of supply and demand on the oil price.

When trading oil stocks, you deal with multiple layers of analysis. These layers include product sales, revenue, expenses, earnings, and cash flows. You also evaluate management effectiveness and more. Depending on the current equity market environment, oil stocks move in correlation to oil prices. Alternatively, they not align with oil prices due to specific company factors. This is beneficial. But, it also open you up to more risk.

Another potential advantage of trading futures is diversification. Portfolio diversification strategies do not guarantee a profit. They do not protect against losses in declining markets. Nonetheless, these strategies are designed to help offset exposure in any single position. They help traders protect themselves against wide swings in key sectors. Remember, futures products span across six different types of assets including equity indexes, energy, metals, interest rates, agriculture, and currencies. The wide range of products in futures helps to offer the flexibility to diversify any portfolio.

As you recall, futures products trade nearly 23 hours per day, six days per week. This makes futures more accessible. They allow you to trade around events that arise outside of equity market hours. During less active trading hours, there can be lower liquidity, higher volatility, and wider spreads. Price moves are more pronounced, and losses will be larger outside of normal trading hours.

Many futures products are also considered very liquid, which helps make entering and exiting a position easier. Still, remember that active trading can lead to higher deal costs. These costs can cut into your potential gains or compound your potential losses.

Understanding the benefits and risks of futures trading can help you better decide if trading futures is right for you.