Knowing the disadvantages of trading futures is also important when you start learning the futures market. In this article, I will briefly explain some of the disadvantages of trading futures market. You can learn about advantages here.
- Settlement Risk
- No Control Over Future Events
- Complicated Products
- Leverage Issues
- Expiration Dates
- High Volatility
- Price Limits
Settlement Risk
One of the disadvantages of trading futures is Settlement risk.
All executed trades need to be settled and closed at some point. Daily settlement takes the form of automatic debits and credits between accounts with any shortfalls being recovered through margin calls. Brokers are obligated to fulfill all margin calls. Use of electronic systems with online banking has reduced the risks of failed daily settlements. However, non-payment of margin calls by clients poses a serious risk for brokers.
No Control Over Future Events
Future trading can be highly unpredictable and often involve significant risks. For example, you’ve invested in orange juice futures but Florida suffers a devastating freeze that kills off one-half of the state’s crop, which means there will now only enough oranges for everyone to pair their own demand! This puts pressure on prices as well because with less supply comes increased demand leading them up higher than what would otherwise happen without these circumstances forcing changes within economy theory itself by raising fears about how long term this situation might last due certain events taking place outside our control such weather disasters where unfortunately nothing else seems able withstand except if human intervention steps into play using methods learned over time like boosting production techniques.
Complicated Products
Futures contracts are complicated and can be difficult for new traders to understand. The different sizes of these futures Contracts make them seem overwhelming, but with a little trial-and error you’ll find that they’re not as hard or impossible than one might think!
A corn contract is worth 5k bushels per unit (5 thousand), while crude oil goes up by 1 thousand barrels at $10 each time; 10 year treasury notes trade off 100 grand total between two parties who agree on whether interest rates will go up/down
Leverage Issues
Futures contracts are a great way to invest in something that doesn’t happen until later. The leverage offered by these futures markets can be both an advantage and disadvantage, as it allows you trade smaller amounts of money than would otherwise needed for the purchase price if there was no opportunity at all – say 5% or 10%. However this also means your investment may move quickly depending on whether lady luck is smiling upon us that day; sometimes prices tick up/down within minutes which could mean bad news where we lose more then just some funds
Expiration Dates
Futures trading is a highly competitive and dynamic industry. It’s important to be aware of the risks that come with futures contract expiration dates, as they get closer: Clients can fail pay margin calls; brokers may have difficulty closing out positions due changes in markets increasing risk from loans being offered at below market rates–just like banks do when too many customers come asking for low-interest mortgages (or other products).
High Volatility
The futures market is quite volatile and can incur large losses for investors including their margin money. Though the minimum contract size requirement in this market isn’t as high compared to other formats like stocks or bonds, it still amounts up being significant sum that would keep away many small traders from participating at all because of how complex things get when dealing with fluctuating prices based on goods being traded over time periods ranging between weeks (of course), months etcetera – not just one day but an entire year’s worth!
Price Limits
Many commodities have a daily limit on how much the price can change. If a commodity value is changing rapidly, it will quickly reach the limit price each day and traders will not be able to continue trading. A futures trader who is caught on the wrong side of a trade making limit moves every day may be stuck in the contract with few options to stop the losses.
Similarly, the risk of non-delivery is substantial for physically delivered contracts. Brokers need to ensure that they allow only those clients access to trade deliverable contracts till maturity who have the capacity and ability to make good on delivery obligations.