Advantages and Disadvantages of Futures

The advantages of trading futures contracts:

1) The commission charges for futures trading are relatively small as compared to other type of investments.

2) Futures contracts are highly leveraged financial instruments which permit achieving greater gains using a limited amount of invested funds.

3) It is possible to open short as well as long positions. Position can be reversed easily.

4) Lead to high liquidity.

The disadvantages of trading futures contracts:

1) Leverage can make trading in futures contracts highly risky for a particular strategy.

2) Futures contract is standardized product and written for fixed amounts and terms.

3) Lower commission costs can encourage a trader to take additional trades and lead to over-trading.

4) It offers only a partial hedge.

5) It is subject to basis risk which is associated with imperfect hedging using futures.

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