I’m focused on the future, just not futures. These things are not for me and I’ll tell you why. First, let’s start with a definition courtesy of Investopedia:
A futures contract is a type of derivative instrument; whereby two parties agree to transact. This contract obligates the buyer to purchase an asset (or the seller to sell an asset), at a predetermined future date and price. Futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be played a few ways but I’ll highlight a couple and the risks they mean to me:
When an investor “goes long” they are agreeing to a contract of a certain price – to profit from an anticipated price increase in the future. This is considered somewhat a “traditional” futures route since over time most stock prices tend to rise. You just hope this happens as per the contract made.
When an investor “goes short” they are not looking for a price hike – they get the contract expecting a price decline. By “shorting” you are borrowing the contact from your broker, selling it and hoping the value drops even more so you buy it back again and get the difference as profit.
The thing with either strategy is you are working with a binding contact and you are certainly making a bet you know what will happen in the future. For some investors the use of futures turns out to be very profitable. For other investors, making such bets are just that and this is really just another form of gambling, a zero-sum game. Use of options and futures are zero-sum games since for every person that makes good on a contract there is another party that loses. You can watch a fun 2-minute video about that here. On the contrary, I feel the stock market is not the same game since for all long-term investors real returns (after inflation returns) are gained because the stock market increases over time.
In my past life as an investor although I didn’t deal with futures I toyed with a couple of penny stocks, hoping for quick wins. Actually, I still have one penny stock in my portfolio. I keep it there to remind me of my gambling days from the past and now my super boring approach to investing today: using a combination of dividend paying stocks and Exchange Traded Funds (ETFs) across all my accounts.
For investors with some special knowledge and talent to profit from futures trading, I applaud them for their guts and timing. I honestly do. Those individuals are certainly better traders than I ever will be. I’ve simply tried and failed at speculation games in the past and I won’t get caught in them again.
What’s your take on futures or shorting? Instead of futures trading, have you ever played around with penny stocks like I did?