Why Trade EMini Futures Contracts And Not Stocks?
Because you get 100 to 1 leverage trading every contract! Other reasons include:
There is no up tick rule like the stock market. You can trade long or short at any time.
The EMini is highly liquid with 800,000+/- EMini futures contracts traded daily so there is very little slippage on market orders.
The EMini represents the consensus of value for all stock in the underlying index, so the effect of news spikes about individual stocks is minimized.
You can day trade this index and be in cash every night.
You can freely buy and sell depending on the margin in your account. There is no margin
interest charged, and you can use interest earning T-Bills as collateral.
You can start trading with as little as a $5,000 margin account. An account size of $15,000 will help you optimize your trading profits. Some brokerage will allow you to trade 1 contract with $500 in your account.
On the Russell 2000 EMini TF with a $500 margin per contract, making just one point (equal to $100) on one contract is a 20% gain in equity. (Losing one point is a 20% loss of trading equity). Taking a trade for a profit of 3 points is a return on investment of 60%. 4 points would equal 80% and 5 points would in fact double your initial investment. Where else can you expect to make that kind of return in a few minutes?
They are highly leveraged instruments and an investor doesn’t have to put up much money to own the value of the contract as ‘margin’. This means that the investor can trade much bigger amount of the commodity trading and if he is spot on with the movement of the market the trader’s profits can be ten times his initial margin deposit.
Speculating on the futures market is essentially an investment not in a physical commodity such as 2,000 barrels of oil or 100,000 lbs of sugar, but a paper investment. Speculators generally do not exchange a commodity as for them it is simply a paper transaction because the contract is reversed out before it matures.
Investors in the futures market can make a lot of money much more quickly than in any other market. This is possible because the futures prices tend to move more quickly than the cash markets and the investor can trade ten times the amount of the initial margin he puts up. Of course you could quickly make a loss too; however using stop loss techniques can minimize losses.
Because trading in the futures market is done by open outcry in the trading pits of the futures exchanges there is little chance of someone taking an unfair advantage by using ‘insider information’.
The futures market is also very liquid and there is always a buyer or a seller to take a market order. This ensures that prices are not volatile and jump about between levels in a short period of time.
There are no up front commission payments in the futures market as all charges are paid when the contract ends. Commission charges when compared to other forms of investment are fairly small.
Losses that are incurred when trading futures can be deducted from ordinary income up to an amount of $3,000 per tax year. (As of writing)
You can spend your gains on a new trade without having to close out your position as long as you have the margin to do it. With other investments such as stocks and bonds you have to sell your investment before spending your profit.
- · Emini Futures contracts can be closed out any time before the maturity date without any hassles
- · You can trade after normal market hours every day on the Globex exchange
- · Lower margin requirements than the full-size contract
- · Round-the-clock electronic trading platform (Globex)
- · High liquidity and, therefore, minimal slippage and tight bid/offer spreads
- · Ability to go long (buy) and short (sell) with no up-tick rule
- · Large volatility and high leverage
- · Very low brokerage commissions
- · Lower tax rate (for US traders), and
- · Minimal tax reporting requirements
- Lower tax rate than trading forex or stocks:
Income from trading EMini futures is taxed at a “blended” rate of 23% (60% capital gains taxed at 15% + 40% income taxed at 35%). Gains from trading stocks or cash forex is taxed at 35%.
- No trade-by-trade accounting:
Another advantage of the tax treatment of EMini futures is that the tax reporting requirements are minimal. In particular, no trade-by-trade accounting is required, only the net income for the full year is needed.
Marking to Market:
A futures contract is settled daily by means of marking to market. If profits go up for the day, the futures purchaser tallys up a gain.
At an established time every day, exchanges such as the Chicago Mercantile Exchange close for half an hour to determine the day’s losses and gains to traders’ brokerage accounts. If an account balance falls below the needed minimum, added money will be asked for by means of a margin call. Failure to fulfill a margin call will trigger a broker to liquidate orders.
Long-term capital gains are usually affiliated with holding periods of a year or more, the mixed straddle rule by default splits futures gains as 60 percent long-term and 40 percent short-term, in spite of the genuine contract holding periods. Long-term capital gains are taxed at a max of 15 percent, but short-term capital gains are taxed as regular income. Losses can be used to counterbalance gains. You can carry back your losses up to three years by using them to offset gains in previous tax years if you have more losses than gains
Tax advantage over stock trading: For stocks held less than one year (short-term capital gains) an investor would have to pay based on his/her tax bracket, ordinary income rate. With futures, an individual would most likely have to pay a lower tax rate because of the IRS 60/40 rule. Under this rule, 60 percent of any gains on futures positions would be taxed at a more favorable rate while 40 percent would be taxed at ordinary income rate.
Regardless of how long the contract is, 60% of commodity profits are treated as long term capital gains and 40% of profits are treated as short term capital gains. Long term capital gains have a lower tax rate than short term capital gains, unlike the stock market where stocks held for longer than one year only have long term status. Comments apply to US-based traders and remember to always get your own tax advice For information on the tax treatment given different trading strategies, please consult a tax adviser.
Securities vs. Commodities
Securities futures capital gains/losses are reported either on Schedule D (Capital Gains and Losses) or as ordinary capital gains/losses on IRS Form 4797 Part II (Sales of Business Property) if you elected mark-to-market accounting. Your securities trades are taxed as short-term capital gains at the ordinary income tax rate of up to 35%.
Commodities futures capital gains/losses are reported on Form 6781 (Section 1256 Contracts), which qualifies these for an advantageous tax split: 60% at the long-term rate of 15% and 40% at the ordinary short-term rate of up to 35%, or a combined rate of 23%, for a tax savings of 12%.
Because of this attractive 60/40 split, most commodities traders forego mark-to-market accounting and its favorable “loss insurance” in order to reap the benefits of the lower capital gains rate.