Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successfully investing money. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.
Tip of the week: “Investing money in futures gives you high leverage, but leverage works two ways.”
Futures trading provides a perfectly legal way to bet on price changes in commodity, currency and financial markets. When you buy or sell a futures contract, you commit yourself to buy or sell a quantity of a commodity (or currency or financial instrument) in the future. The date and quantity are standard; you fix the price when you buy or sell the contract.
Here’s an example: Say you buy a March wheat contract at $7.14. That means you’ve agreed to a contract for 5,000 bushels of wheat in March, paying $7.14 each, for a total of $35,700. The seller has agreed to sell that much wheat at that price on that date.
Since the transaction takes place in the future, the buyer and seller only put up a deposit of, say, 5% of the $35,700. This provides enormous leverage. A 5% price rise represents a 100% gain for the buyer and a 100% loss for the seller.
Futures started out as a convenience for commercial interests. Farmers sell wheat futures to fix their income from this year’s harvest. Bakers buy wheat futures to fix their flour costs. But most futures transactions take place between speculators who are simply betting that prices will rise or fall. Most contracts get closed out prior to delivery.
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Futures are different from investing money in stocks and mutual funds
Futures contracts have a fixed life, usually under one year. You can hold stocks or mutual funds indefinitely.
Futures contracts don’t provide income. By investing money in stocks (and funds that invest in them) you can receive dividend payments.
Futures are a speculation — a bet on price movements. To make money, you have to outguess other players by a wide enough margin to pay commissions. Stocks and funds are an investment because they let you profit from economic growth.
Our investment advice: In theory, high leverage makes it possible to turn a modest stake into a fortune in futures. In practice, most futures speculators wind up losing money. Successful investors recognize that investing money in futures is a form of recreation. You do it for fun, not profit.
Next Wednesday, December 15, 2010, Investor Toolkit will look at where your home should fit in your investment strategy.
If you want to invest aggressively, you are far better off to avoid futures and instead buy aggressive stocks, such as those we recommend in our Stock Pickers Digest newsletter.
The latest Stock Pickers Digest gives you our full analysis, including clear buy/sell/hold advice, on 18 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s, more you can get this issue absolutely free. Click here to learn how.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
This privacy policy is applicable to all TSI Network Visitors, Clients, Employees, Suppliers, Web sites, Management, and all other interested parties. Any links to or from our site are not covered by this policy. We encourage you to read the privacy policies of every site that you visit.
The privacy of the site/store visitor is very important to TSI Network, and is respected at all times. The information we receive from customers helps us to personalize and continually improve your online experience at TSI Network.
We do not collect or disclose personal information, except when it is provided to us voluntarily by the site/store visitor with their consent.
We store subscriber and password files containing personal information securely. These files are stored in secure areas that are not accessible to the general public. We are always working to ensure the security of your personal information.
We are continuously in the process of improving our sites and services. If any new features or policies require a change to this current policy, we will post a clear notice of this change on pages of our site where the privacy policy appears. The principle behind this privacy policy is to collect information with your knowledge and consent.
What personal information do we collect?
The information we receive from customers helps us personalize and continually improve your online experience at TSI Network. TSI Network may collect personal information online for all legal purposes, which include, but are not limited to:
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Changes to this Policy
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Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
Information presented on this web site or contained in our publications is not an offer, nor a solicitation, to buy or sell any securities referred to on the web site or in the publications. The material is general information intended for recipients who understand the risks associated with an investment in any securities referred to in the publications or on this web site. The Successful Investor has made no determination regarding whether an investment, course of action, or associated risks are suitable for the recipient.
