4 Main Risks Involved In Futures Trading

The futures market is a volatile and risky investment that should be taken only after exhaustive training. Here are the 4 main risks involved in futures trading.

#1: Counterparty Risk - there's always a chance that one side of the trade will not meet its obligations to you.

#2: Competitive Risk - it's possible that prices move better or worse than expected, which can result in either a profit or loss for your trade. 

#3: Settlement risk - this occurs when you're wrong about the date of settlement, and then your options expire without any value whatsoever. 

#4: Day Trade Risk - even if your trade turns out exactly as planned, you could be in for a nasty surprise if the market moves unexpectedly. 

This is from a piece by Charts and Graphs on futures trading: Kevin Hassett, the chairman of the American council for Capital Formation's economic forecasting group, called for an overhaul of how stock trading is governed in order for Wall Street and Main Street to prosper.

Mr. Hassett said he would propose three strategies to regulators and lawmakers that would open stock exchanges to more competition and make it easier for investors to use computer trading systems to buy and sell stocks.

"I think there are major changes that are possible," he said.

It has been more than 20 years since the stock exchanges were deregulated, yet they still face little competition from other trading venues. The S.E.C., he said, should push to ease the burden on market makers who have to post prices on Nasdaq stocks and all but give away their services in an effort to prop up a stock exchange now owned by a Wall Street firm, the National Association of Securities Dealers.

"We need to encourage more competition in our capital markets," Mr. Hassett said at an event organized by the Council of Institutional Investors and the Association for Investment Management and Research.

It wasn't a good year for Mr. Hassett. The Dow Jones Industrial Average lost 382 points, or 5 percent, on Wednesday, at 15,793.80, while the Standard & Poor's 500 dropped 33 points, or 4 percent, to 1,864.40 and the Nasdaq Composite gave up 25 points to finish at 3,298.10 after rising 60 points earlier in the session.

Mr. Hassett has been sounding the alarm on Wall Street's regulatory overlords for several years now: "There is something wrong with the relationship," said Mr. Hassett of Federal regulators and Congress during an interview in Philadelphia this morning with The Wall Street Journal. 

"I don't know that we've ever had a time when they have been further apart on major issues. I'm not sure we'll have a solution." 

"I don't know if this is permanent, but I think the gap between them is too wide right now," he said. 

As an example of the regulatory disconnect, he cited last week's announcement that banks would be allowed by regulators to use taxpayer-backed money to trade in derivatives markets. The move drew intense criticism from Sen. Bernard Sanders (I., Vt.), who called it "lunacy."

Mr. Hassett said that although Congress' oversight role is generally "pretty good," it shouldn't try to micromanage financial markets.

"I don't think that you can eliminate the problems by trying to impose micro-regulations on the capital markets," he said. "You need micro-rules, but they're not going to work."

Mr. Hassett, who is also a professor of economics at the University of Notre Dame, has been called the "economic guru" of Mitt Romney's presidential campaign and leads a panel on fiscal policy for Obama's re-election campaign.

Conclusion

And this is from a great piece by Rick Newman writing for Yahoo Finance: The high cost of everything is not the only thing to consider when evaluating a stock.

The other biggest factor is risk. When it comes to making money in stocks, the odds are very favorable but the payoffs can be extremely small. For example, in the past 20 years, you would need to put $100 in a mutual fund 30 times to get back what you originally invested in that fund. For instance, if you invest $100 of that $2,000 a month now, it would take you 243 years to recover that investment.