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- Example with Agriculture (Corn, Wheat, etc..), Metal (Gold, Silver etc…), or Indexes (S&P, Nasdaq, Russell 2000, Liffe, Dax, EuroStoxx, etc….
Comparing Futures or Commodities against Stocks
With $1,000.00 investment, what may a buyer get?
What does buyer get?
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with FUTURES |
Investing $1,000 Margin amount for Soy Beans |
5,000 Bushels of Soy Beans |
If Bushel = $5.00 |
Buyer gets $25,000.00 of product |
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with STOCKS |
Investing $1,000 & 100% margin |
400 Shares |
if Stock = $5.00 |
Buyer gets $2,000
of Shares |
Investment is 12.5 times lesser |
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Outcome
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Win or Loss with FUTURES |
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WIN |
If Bushel = $5.25 |
Buyer gets $26,250.00 |
Profit = $1,250.00 |
Results = Excellent investment |
ROI = 125.00% |
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LOSS |
If Bushel = $4.75 |
Buyer gets $23,750.00 |
Loss of = ($1,250.00) |
Results = Loss bigger than invested |
ROI = -125.00% |
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Win or Loss with STOCKS |
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WIN |
if Stock = $5.25 |
Buyer gets $2,100.00 |
Profit = $100.00 |
Results = Modest Profit |
ROI = 10.00% |
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LOSS |
if Stock
= $4.75 |
Buyer gets $1,900.00 |
Loss ($100.00) |
Results = Modest Loss |
ROI = -10.00% |
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- Example with Currencies (Euro, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar etc……).
With Stocks you buy 100 stocks of Intel as an example at a value of US$20, it will cost you US$2,000 + the trade fees. In order to double your investment, you would have to wait until the Stock reaches US$40. Simple and straight forward process.
With Futures, other notions do come into consideration.
If you buy the Euro Currency at US$1.20 (which is a Futures purchase), it will certainly not request you to wait until it reaches US$2.40 to double your investment.
With Futures, you do not buy 100 Euro Currency (you could but it would cost you a huge margin).
Instead, with Futures you buy at least one lot of Euro which will cost you the margin set for this currency (on Sept04 US$3,240). Then for every one/ten thousand’s movement of the Euro Currency, you will win or lose US$12.50. Meaning, if the Euro moves from 1.2000 to 1.2001, you win US$12.50. If it moves to 1.1999, you will lose US$12.5 not counting the trading fees.
Upon closing your Futures trading position(s), the Margin amount removed from your account when you did open your position is moved back into your account in its entirety. Only the gain or losses added to the trading fees will change your portfolio.
Therefore since the Euro moves by many Pips (one Pip is one/ten thousand) every day, you could win or lose much more with Futures than you could ever do with Stocks.
You could win US$1,000 in a few minutes and lose it back the next few minutes. It only request the number of Pips to be 80.
Consequently, Trading Futures requires to use Technical Analysis. Emotions usually involved with Stock trading has no room to play in Futures trading. You have to know what to buy or sell and at what time, for how much and what Stop Loss value to set in order to secure your exits. Futures trading is somehow more technical than Stock Trading, more mathematical.
Overall, there are less volume involved in Futures than Stocks since Stocks is practiced by so many traders worldwide, but the Volume of Futures Trading is gaining much more momentum every year than Stocks trading does. However this might be related with the stake of the economy.
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