About Futures
Futures are the only leveraged financial product allowed to be traded by the American investor. This means huge liquidity in some of the futures markets and, due to high competition, also means futures can be amongst the cheapest forms of leveraged trading.
Benefits
- Trade on Margin - Trade without having to pay the total value of your position. Trading on margin provides the investor with leverage or gearing on the capital invested, and frees up capital for other uses. (Please click here for our margin rates).
- Financial Futures are cash settled, meaning no physical delivery of any stock upon expiry, making them a useful hedging and speculating tool.
- Short Sell - Ability to sell short and buy long any future contract, thereby profiting from falling and rising markets respectively.
- Trade execution and confirmation in under 1 second.
- Trade at market prices (not a market maker's quote).
- Trading strategies can be implemented that would otherwise be impractical except to the sophisticated institutional investor.
- Fully automated trading solutions.
Example of a futures trade
Please find below a comparison between trading futures and spread betting.
Each trader anticipates rising stock prices and so buy in to the FTSE futures.
The future rallies from 6600 to 6610.
Client A is trading Futures and Client B is spread betting.
Client A
Client A buys one June FTSE future contract at 6600. Since the value of the futures contract is £10 times the index, each one point change in the index represents a £10 gain or loss. So a 10 point move results in gains for Client A of £100.
Client B
Client B takes a spread betting position in the June FTSE futures when the market price is 6600. To match the leverage of the Futures contract Client B takes a £10 per point position. The spread on the FTSE is 2 points and so Client B takes his position at 6601. Following the rally Client B closes his position when the market price is at 6610 and so gets an exit price of 6609.
| Futures (Client A) | Spread Betting (Client B) | |
|---|---|---|
| Initial Margin | £2520 | £1000 |
| Entry Price | 6600 | 6601 |
| Commission | £4 | £- |
| Funding | £- | £- |
| Exit Price | £6610 | £6609 |
| New Profit | £96 | £80 |
If the FTSE Index were to go down 10 points:
| Futures (Client A) | Spread Betting (Client B) | |
|---|---|---|
| Initial Margin | £2520 | £1000 |
| Entry Price | 6600 | 6601 |
| Commission | £4 | £- |
| Funding | £- | £- |
| Exit Price | £6590 | £6589 |
| New Profit | -£104 | -£120 |
As you can see Client A is £16 better off per trade trading futures with Twowaymarkets than Client B spread betting. Dealing 5 times a day, this represents savings of £1600 a month and £19200 a year.
Whilst futures trading is not tax free, it does offer substantial cost advantages over spread betting. Many spread betters justify their high cost of trading with tax free profits. However, these extra costs could be the difference between making a profit or a loss. In spread betting, not only are profits tax free but so are losses. In futures trading any losses can be offset against any future capital gains. Those tax savings associated with spread betting therefore become immaterial when the high costs are the difference between winning and losing trades.