Sunday, May 27, 2007

Futures Contracts - Profitable Investment Alternatives?

With the growing popularity of futures trading, more and more people are jumping into this interesting form of investing. People quickly find out that futures contracts are vastly different than agreements to purchase common stocks; with futures contracts, you are not actually buying a particular commodity, you are obtaining the right to purchase the underlying asset during a particular time period.

Pork Bellies?

Another difference between investing in the stock market and investing in futures contracts is the asset itself. Of course stocks are the assets involved in the stock market, while the commodity assets in futures contracts include:

• Currencies – The currency market is one of the best known commodities, trading the likes of the British pound and the American dollar.

• Interest Rate Futures – T-Bonds represent long-term interest rates and Eurodollars are for short-term interest rates.

• Energy Futures – Natural gas, heating oil and crude oil futures are the most widely known in this sector.

• Food Sector – Coffee, orange juice and sugar are well known commodities in this sector.

• Metals – Gold, silver and copper are traditionally strong commodities.

• Agricultural – Wheat, coffee, cotton, soybeans, pork bellies and corn futures are among those that are best known.

With so many futures contracts available, it can be difficult to decide which commodities interest you, especially if you are new to commodities trading. Sometimes it can be helpful when you start trading to begin with more popular commodities.

Below are five of the most popularly traded futures contracts:

1. S&P 500 E-mini – This is extremely popular for those investing in the futures markets. The E-mini can be traded electronically 24 hours a day, five days a week. In addition, the E-mini has most of the same advantages of the regular S&P 500 commodity but the cost of investment is much less.

2. E-mini NASDAQ 100 – The E-mini NASDAQ 100 follows the movement of the NASDAQ 100. Like the S&P 500 E-mini, this futures contract can be electronically traded and the contract and the amount of margin you have to set aside to trade the contract are smaller than a standard contract. Since most individuals don't have large enough accounts to trade regular contracts for the NASDAQ 100, the E-mini works out great.

3. Light Sweet Crude Oil – Probably the most famous commodity traded is oil futures. When you see the price of oil discussed on the evening news or in an investment newsletter, this is exactly what they are discussing.

4. Gold – If oil isn’t the most famous futures contract, then gold surely is. A gold contract tracks the price variations of one ounce of gold. Gold became an important part of the US economy when the United States went to the Gold Standard in the 1970’s. Since then, the price of gold changes dramatically, almost always in the opposite direction of the US dollar. Gold investments are frequently used as hedge funds because of the relationship with the US dollar.

5. E-mini Euro FX - The E-mini Euro FX contract tracks the movement of the exchange rate between the U.S. dollar and the Euro. The "E-mini" means that the contract and the amount of margin you have to set aside to trade these futures contracts are smaller than regular contracts. Most individuals don't have large enough accounts to trade a regular contract for the Euro, so E-minis are excellent investment strategies.

Conclusion

Futures contracts provide interesting and potentially profitable investment alternatives to many investors. Understanding the investment basics of futures contracts and commodities such as these will help you to be a more successful trader when it comes to futures contracts.

By Stephen Bigalow

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