5 advantages of futures trading

Futures trading is when a buyer purchases a futures contract to speculate on price movements of an underlying asset. A futures contract is a legal and binding contract drawn up between two parties to buy or sell an asset at a specified time in the future. The asset traded is usually a commodity or a share, but it is not limited to these two.

Is futures trading legal in Singapore?

Futures trading is absolutely legal in Singapore, and residents and citizens can trade futures with a broker recognised and regulated by the Monetary Authority of Singapore (MAS).

Advantages of trading futures

Depending on a trader’s expertise and experience, they may choose to trade futures for the below advantages they have over other products:

  1. Futures are highly leveraged investments

Futures are leveraged products, which means that traders only put in a margin (an initial deposit that is a fraction of the entire contract value) to purchase the contract. This margin is typically about 10% of the entire position size, and traders who are confident in their trades can expose themselves to a much greater value on the market than if he were purchasing a stock or commodity individually.

For example, a trader wants to invest in a certain stock that costs $150 per share, and he wants to purchase 10 shares. If they were to go by the traditional stock trading route of purchasing individual stocks, he would need to put down $1,500 upfront and in full in order to make that purchase.

With a futures contract, he can purchase the contract by only putting down 10% of the full position size. This means he will only need to put down $150, which is his margin. He predicts that the price of the shares will rise and he is indeed correct. In one day, the shares have increased by $10 each, and he would have made a profit of $100 with his 10 shares, even though he has only put down $150 originally.

Alternatively, if he does have $1,500, he would have been able to open a position worth $15,000 in shares, effectively purchasing 100 shares with the price of 10. This means that if the share price increases by $10, he will be able to make a profit of $1,000. Compared to if he had invested in individual stocks, which would have made him a profit of $100, this is ten times the profit for the same amount of capital invested.

  • Futures trading has low commissions and execution costs

Futures trading typically has very low commissions and execution costs. Depending on the broker or contract provider, commissions can be as low as 0.5% of the total contract’s value. This is especially true for online trading platforms that encourage independent investing and do not interfere with trades. For a full-service broker that offers educational resources, guidance, and professional customer service, commissions and execution costs may be higher.

  • Futures can be used as a hedge and in portfolio diversification

Futures trading differs from ‘standard’ or ‘regular’ trading in that they speculate on price movements that will take place at a specific time in the future. This means that while there is less freedom and flexibility in when you want to close your position, if you have good foresight, you will be able to make ideal trades anyway.

Futures are great for hedging currency risk, and they are a popular option for companies that conduct business internationally and require making forex trades regularly. Companies can anticipate fluctuations in the forex market and they can purchase a futures contract to lock in the best prices.

Futures contracts are also accommodating of different assets and therefore can be efficient at portfolio diversification. For example, futures traders can invest in stock indices instead of individual stocks, such as the S&P 500 as opposed to investing in all the individual companies that the index tracks. This is a fast and relatively inexpensive way to invest across sectors, which can minimise risk to a certain extent.

  • The futures market is very liquid

The futures market is very active, and futures contracts are traded frequently and in huge numbers daily. Traders who invest in futures contract do not have to worry about not being able to find buyers and sellers, and market orders will be fulfilled quickly.

The liquidity of the market also ensures that the market will not fluctuate dramatically, which is always a concern for futures traders when they near the maturity date of their contracts.

This liquidity is partly due to the flexibility in trading hours. Many futures markets are open overnight, and traders can buy and sell contracts beyond traditional market hours. There are also extended trading hours for certain markets that are particularly active, such as stock index futures. With extended trading hours, traders can participate 24/7.

  • Futures trading is quick and convenient

Futures trading involves the exchange of a contract on price speculation instead of the exchange of a physical asset, which makes the process much quicker. The market being very liquid with a steady stream of supply and demand from buyers and sellers also contributes to this speed and convenience.

Futures traders also only bet on the underlying price movements of assets in the short-term and therefore do not actually own the asset outright when they make a purchase. This makes it much easier in terms of record keeping, as companies do not have to keep track of them in order to pay out dividends annually.

Greater trade execution efficiency also translates to the potential of a trader being able to make more money in the same timeframe as they would if they were to trade assets the ‘traditional’ way. Along with the use of leverage, investors can end up making multiple times in profit. Futures markets also tend to move faster than cash and spot markets, adding to the speed of trading.

A word of caution

However, despite the numerous advantages of futures trading, investors would do well to remember that it also comes with risks. They include market risk, leverage risk, and liquidity risk.

The futures market is not known to be hugely volatile, but underlying prices of assets can still fluctuate and investors can lose money. Combined with the use of leverage, investors may also find that their losses become quite substantial and may even exceed their initial investment. Liquidity risk is also present when trading certain assets via futures contracts.

The bottom line

Futures trading can be hugely lucrative and has proven to be so in the past. Experienced traders enjoy making great profits from trading futures in relatively short timeframes, and they are available for trading in Singapore through reliable and regulated institutions. For more information on how you can get started, you can learn more about futures through the Saxo Bank Group. When trading, remember to always be aware of your risk tolerance and understand that losses are a natural part of every trader’s journey.

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