Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 101

profit margins (pardon the pun) if you don't use leverage. And most people won't trade without leverage even if they can afford it. Do you have $310,000 lying around to buy ten gold contracts at $310/oz. outright? And even if you did and gold moved up $10/oz., your profit would be $10,000, a mere 3% return. In the above margin example with a total investment of $6,200 in gold futures and a profit of $10,000, your return is 161%. Of course the downside is just as magnified with margins. A $3 price drop in the contract's price would result in a 1% loss if you were an outright buyer. However the same $3 price drop in gold contracts results in a 48% loss for you, almost half of your $6,200 original investment, if you bought your contracts on margin. You've been warned! Leverage is a double-edged sword, but just about all futures contracts are traded on margin.

Futures Categories

We have used gold in many of our sample cases because metals provide pretty straightforward examples. If you look at relevant sections of financial publications and papers you will undoubtedly notice that futures are categorized in many different ways.Which ones are correct? Who knows. I like to take a broad view of them, and as such I divide futures into three main categories: Financial, Natural Resources, and Agricultural.

Financial
This category, as suggested by its name, deals with hard money instruments. The supplies of the underlying commodities can often be modified by quick human intervention, and therefore these futures are not directly affected by natural disasters (although indirectly, everything affects everything). These include interest rates, equity indices, precious metals, and currencies among others. As an example, the Federal Reserve can manipulate interest rates by infusing currency
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  • Book Chapters
    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

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