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Essentials of Futures PDF |
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Potential Benefits and Risks
In addition to the hedging benefit, futures provide an opportunity for speculation, or investing in higher-risk vehicles in an attempt to profit from an anticipated price movement.¹ They are also popular because of their trading efficiency—that is, the transaction costs are generally lower than the costs of trading the underlying instruments. Once available primarily to the institutional marketplace, there are many products today that give individual investors direct, relatively inexpensive access to futures. While they are risky as stand-alone investments, futures can help manage risk within a diversified portfolio.
Benefits |
Risks |
Potential to add leverage² to a
portfolio, which—when combined
with diversification—provides
opportunity for outperformance
|
May be affected by variables such as weather, livestock disease,
embargoes, tariffs and international
economic, political and regulatory
developments. In addition, many of
the underlying global investments
are risky |
| Non-correlation (that is, they may
move in the opposite direction) to
equities and bonds |
Potential loss if you’re on the
opposite side of the price movement |
| Potentially high volatility (or wide price swings), which can
provide opportunity if you are on
the profitable side of the contract |
High volatility, which can provide
opportunity as well as increase risk |
| Can perform well in both rising
and falling markets |
Challenging to be in the right
market at the right time |
 
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¹ When investing in speculative investments, investors must be willing to assume potentially greater-than-average market volatility and investment risk.
² Leverage is defined as using given resources in such a way that the potential positive or negative outcome is magnified. The use of leverage may not be suitable for all investors.
This educational piece is not intended to be comprehensive. Before investing in managed futures, be sure to discuss them with your financial advisor to make sure they are appropriate for your time horizon, risk tolerance and objectives. Investors should be aware that there are risks, special costs and requirements associated with financial futures and that they may not be appropriate for all investors. When owning futures, investors should consider the impact and risk of maintaining a margin account. Margin is defined as borrowing money from a broker/dealer to purchase securities. It is sometimes called “buying on margin.” Should an adverse price movement affect your securities, a margin call will be issued, which demands additional investment to cover the loss. Failure to meet a margin call can result in losing more than your original investment. Futures should be regarded as short-term trading vehicles and should be regarded as inappropriate for anyone who is unable or unwilling on short notice to access other financial assets in order to meet margin calls on open futures positions.
The information provided here is intended to be general in nature and should not be construed as investment advice or a recommendation of any specific security or strategy.
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