If you’re an investor who has primarily focused on the securities market, it may be time to diversify your portfolio. One of the best ways to do so is through the futures market. The futures market is flush with opportunity and should serve as a particularly attractive choice for investors looking to take a long position. Below, you’ll find the three primary reasons why long-term investors should want to enter the futures market.
Asset Diversification | Delta Trading Group
The futures market is rather broad, providing investors access to hundreds of asset classes, including:
- Debt instruments
- Equities indices
Many assets in the futures market adhere to standard economic principles in which supply and demand drive one another. When supply increases, demand tends to decrease, and vice versa. Numerous futures assets are not volatile, and their positions are predictable over time. While predicting futures is not an exact science, the lack of volatility could prove worthwhile in diversifying the riskier assets that you already have in your portfolio.
Speculative Opportunities | Delta Trading Group
Because futures asset classes adhere to basic economic principles, investors can engage in more speculative behavior. Whereas traders tend to worry about the short-term, trading live based on what they expect to happen in the coming minutes and hours; investors are more worried about long-term results.
For instance, imagine you’re investing in the futures market and are interested in a corn crop. There was recently a pest outbreak that ravaged the corn supply in the United States, driving down the cost of corn. However, you would expect the corn supply to return to its normal levels within five years. There is a buy-low opportunity based on a speculative opportunity.
Similarly, investors find that the futures market is incredibly liquid and provides low transaction costs. This makes it easy for investors to execute the trade on an opportunity. For this reason, many investors find the futures market significantly more appealing than conventional asset acquisitions.
Risk Management | Delta Trading Group
Investors should also consider entering the futures market because it allows them to manage risk, providing even novice investors with the opportunity to preserve risk capital. One of the reasons why the futures market is an attractive risk management tool is because investors don’t hold onto the asset itself. Instead, they keep a contract that enables them to buy or sell the asset at a later date. While holding the agreement, the actual value of the asset could change drastically.
This, for one, allows investors to mitigate financial risk, as it limits the negative impact of inflation. It also allows investors to avoid systemic risk, which occurs when an entire industry takes a nosedive as the United States housing market did in 2008. By having a futures position on a safe-haven, like gold, investors can reduce the chance of a systemic failure wiping out their entire portfolio.
Lastly, the futures market allows investors to avoid production risk. Many producers use futures contracts as a way to ensure profitability on their goods. This helps reduce volatility, making certain commodities quite stable.