| Are you new to trading? Perhaps you
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| | service, like interest rates, from
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| wonder what the difference is between
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| | producers.
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| trading Stocks and trading Futures. Often
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| | To buy stocks, you only need enough money
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| when I meet someone new who inquires as
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| | in your account to purchase the stock
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| to what I do, I get a response of
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| | outright plus commissions. Once you make
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| "that's like trading stocks, isn't it?"
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| | the purchase, the money is removed
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| In some ways they are similar, but only
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| | immediately to make the purchase. With
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| minutely so. So let's consider some of
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| | trading futures, since you are not
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| the major differences between the two.
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| | actually purchasing anything but simply
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| Most individuals have likely traded
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| | entering a contract to do so at a later
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| stocks at one time or another. Usually,
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| | time (which you will exit prior to avoid
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| it is to buy in order to 'own' a
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| | delivery), the broker will require a
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| percentage of a particular company or
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| | certain amount of margin (good faith
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| to liquidate such partial ownership. They
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| | deposit to cover any possible losses)
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| pick up a phone to call a broker or go
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| | in what is called a 'margin account'.
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| online to purchase or sell. The order is
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| | Each commodity has a different minimum
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| facilitated through an 'exchange', such
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| | margin requirement depending on several
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| as the New York Stock Exchange for
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| | factors. Your broker may use the exchange
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| example.
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| | calculated margin or require a
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| Buying and selling Futures is similar in
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| | different margin of their own. If the
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| this respect. You can call a broker or
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| | value of the commodity were to decrease
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| go online to buy or sell Futures
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| | and you are on the buy side of the
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| contracts. The order is then
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| | contract, then your contract has lost
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| facilitated througha commodity exchange,
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| | value and your broker will notify you
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| such as the Chicago Merchatile Exchange
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| | if your unrealized losses exceeds have
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| for example. Yet while buying a stock
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| | gone beyond your minimum margin
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| gives you part ownership in a company or
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| | requirement. This is called a 'margin
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| portfolio of companies (as in a fund),
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| | call'. Naturally you would want to have
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| buying a Futures contract does not give
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| | more capital than simply the margin
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| you ownership of a commodity or
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| | amount when trading futures to avoid
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| product. Rather, you are simply
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| | these broker calls. The broker has the
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| entering into a contract to purchase the
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| | right (and likely will) liquidate your
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| underlying commodity at a certain price
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| | position if you are getting too close
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| at a future time, noted by the contract.
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| | to not having enough to cover the losses
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| For example, buying one May Wheat at
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| | in order to protect themselves.
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| 3.00 simply creates a contract between
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| | With buying stocks outright, there is no
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| you and the seller (whom you need not
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| | potential for a margin call. You simply
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| know as this is taken care of via the
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| | own the stock outright. So perhaps you
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| exchange) that come May you will take
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| | may be wondering why anyone would
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| delivery of 5000 bushels of Wheat at $3
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| | bother buying futures contracts rather
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| per bushel, regardless of what the price
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| | than stocks. The major answer is:
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| of Wheat at market happens to be come
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| | LEVERAGE.
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| May. As a speculator simply trading to
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| | Leverage gives the trader the ability to
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| make a profit from trading itself and
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| | control a large amount of money (or
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| with no interest in actually taking
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| | commodity worth a lot of money) with very
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| delivery of product, you will simply sell
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| | little money. For example, if Live
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| your contract prior to delivery at the
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| | Cattle futures requires a minimum margin
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| going market price and the difference
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| | of $800 to trade a single contract, and
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| between your buy price and sell price is
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| | a single contract represents 40,000 lbs
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| either your profit or loss.
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| | at the current market price of say 75,
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| When you buy a stock, you are part owner
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| | you would be controlling $30,000 worth
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| of a company. When you buy a Futures
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| | for a leverage of over 35:1. This is
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| contract, you simply are entering a
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| | appealing to many traders and justifies
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| contract. With stocks, you will pay for
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| | the risk. What is that risk? Just as
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| the stock at the time of your purchase
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| | leverage can work in your favor, it can
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| plus broker commissions. When buying a
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| | work against you at the very same
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| futures contract, you are simply
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| | ratio. Known as a 'two-edged sword'.
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| entering the buy side of a contract and
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| | You can increase the leverage of trading
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| no monies is paid other than
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| | stocks if you trade with a margin
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| commissions to your broker.
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| | account. This usually allows you to
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| Stock exchanges and commodity exchanges
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| | purchase stocks on margin at the usual
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| are both membership organizations
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| | rate of 50%. So for every dollar you have
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| established to act as middlemen between
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| | you can purchase $2 worth of stock. The
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| the buys and sells of all types of
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| | leverage is 2:1. How this works is that
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| traders, from business entities to the
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| | the broker is actually 'lending' you the
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| individual small trader. The stock
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| | other 50%. Of course by purchasing
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| exchange act to bring capital from
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| | stock with margin you can lose more than
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| investors to the businesses that need
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| | you have due to the leverage. And in
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| that capital. They facilitate the
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| | this case you can end up getting a
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| transfer of property rights (ownership in
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| | 'margin call' from your broker if your
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| the various companies offering
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| | stock losses too much value. But
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| stock).The commodity exchange act to
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| | trading stocks comes no where close to
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| bring people willing to assume risk for
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| | the kind of leverage you get trading
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| the opportunity to make a substantial
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| | Futures.
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| amount of money for taking such risk.
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| | When you look at these two trading
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| This helps transfer the price risk
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| | vehicles, the bottom line comes to
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| associated with ownership of various
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| | MARGIN and LEVERAGE.
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| commodities, such as Soybeans, or a
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