![]() Current margin requirements for futures contracts are between 3% and 12%. Margin is the practice of borrowing money from your brokerage to invest. "Futures contracts are inherently very leveraged because the underlying valuation is very sensitive to the amount of funds invested as margin or collateral," says Chester Spatt, professor of finance at Carnegie Mellon University's Tepper School of Business. One of the largest risk factors with futures is related to the margin requirements and price sensitivity. That does not mean however that futures contracts are less risky they are still highly complex financial instruments. A futures contract on the other hand can be based directly on the price of crude oil without the added risk factors that a company may bring. For example, the stock price for a company like Exxon Mobile (XOM) will at times be dependent upon the price of crude oil because of the nature of the company - and other factors like management and competitors. Currently long-term capital gains tax rates range from 0-20% depending on your federal income tax bracket," says Moswen James, an enrolled agent at Get Help Tax.įutures can also help an investor diversify and participate more directly in certain asset classes. However, gains from futures contracts are taxed at a 60/40 rate which is 60% long-term and 40% short-term. "Typically, gains from short-term stock trades are taxed as ordinary income. For stocks, short selling has a higher margin requirement but futures contracts have the same margin requirement on long and short positions making it a bit more conducive for traders who are looking for this high-risk, high-reward tactic.Īs for taxes, some futures trades may qualify for preferential tax rates. ![]() Short selling is the process of selling assets that you've borrowed with the intent on buying it back later for less money. ET, the futures market is open nearly 24 hours a day, six days a week.Īnother benefit to futures trading are the short-selling requirements and tax benefits. For example, futures contracts trade at different hours than the stock market. Other than speculation, some investors prefer futures trading because it can offer a few benefits that are not available with stocks. Step 1: Understand how futures work - and the risksįutures work differently from more mainstream investing options like stocks. Derivatives are contracts that obtain their value from an underlying asset, index, or security. Here are four key areas that you'll want to get familiar with. Precious metals like gold and silver, currencies, US Treasuries and stock indexes like the S&P 500.īut to trade futures, you'll want to understand the risks and investment strategies before moving forward. ![]() The most common types are commodities like wheat, corn, and crude oil. For traders, the settlement is in cash, while some businesses may opt for physical delivery.Ī futures contract can derive its value from various asset types. Futures contracts can be settled in cash or with physical goods. To protect against a sudden surge in prices, an airline company can use a futures contract to lock in current prices, thus nullifying the impact of increasing fuel prices. These contracts were initially created to help businesses navigate unexpected costs.įor example, profits in the airline industry can be heavily dependent on the price of fuel. By clicking ‘Sign up’, you agree to receive marketing emails from InsiderĪs well as other partner offers and accept ourįutures are contracts in which the buyer agrees to buy a commodity or financial instrument at a specified date and quantity at a later point in time, and the seller agrees to sell or deliver the asset as specified in the contract.
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