Futures on Shares and Securities

As opposed to trading shares and securities on a pound for pound basis, futures on shares as an underlying asset class can provide a number of distinct advantages to the traders, including the crucial ability to leverage transaction sizes.  As a means of taking a longer-term position on an asset or instrument, futures on shares are particularly more suited than other derivatives, and are a godsend for many traders looking to diversify their trading portfolio.

One of the foremost functional benefits of trading futures as opposed to commodities or shares directly is the ability to buy in at a much lesser rate, thus demolishing the existing barriers to entry faced by many other traders.

Non-derivative trading requires the trader to stump up 100% of the transaction cost up-front, and all of that capital is invested in the underlying asset – an ‘eggs in one basket’ scenario.  With futures, that isn’t necessary, and traders can still enjoy the same rate of return on their investment for a considerable lesser margin.

Rather than stumping up the cash for a share purchase, or even a partial deposit on a leveraged share buy, traders are required only to foot a margin on the futures price, which is always lower than the value of the underlying asset, thus effectively allowing traders to amplify small transactions significantly in order to reap the rewards of price movements on a larger notional transaction.

The primary advantage of trading shares and securities with futures is the ability to leverage the transaction, afforded by the nature of futures as an instrument.  Because futures essentially stipulate a future transaction and have a primary value of their own, movements in the underlying asset price are amplified through the futures contract price, allowing traders to capitalise on small price movements to the same extent as they would with a pound for pound investment.

It is this leverage that makes futures the attractive and widespread instrument they are today.  Aside from the practical advantages of futures for hedging or locking in the costs of production as a manufacturing business, the ability to leverage and take long-term positions on assets for a lower capital investment has made futures a dynamic, pliable and ultimately popular instrument amongst traders at all stages.

Futures also provide the distinct advantage of saving on tax in the UK when it comes to trading shares.  A direct investment in and sale of shares gives rise to stamp duty and capital gains tax, whereas the investment and sale of futures contracts cuts out the stamp duty liability, providing not only the opportunity for a highly leveraged transaction but also a lower cost for traders to bear.

Futures contracts on shares are an increasingly popular, potentially lucrative alternative to share purchases.  While the underlying asset isn’t acquired until the date of maturity, and may in fact never be acquired by the trader who resells their futures contracts, the ability to leverage transactions while saving on the tax burden and minimising the risk of acquiring failing stocks makes futures an attractive investment opportunity for share traders.

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