Oil futures can make great investments and are probably one of the most actively traded derivatives on the market. Some of the benefits of investing in oil futures include:
- Ability to make substantial profits. Oil futures can be extremely lucrative investments. Some investors have been able to make tens of thousands of dollars with a single trade, while investing much less than would be necessary in the stock market. The price of oil can change substantially in a short period of time, so futures investors can see a sudden appreciation in their investment. In periods when the price of oil skyrockets, everyone would love to be able to purchase it at a lower price. Anyone who holds a future that allows them to do so is going to be in a good position.
- Liquidity. Oil futures are one of the most liquid investments because of the high volume that is traded every day. In fact, they are the most actively traded future on the market and hence the most liquid.
- Leverage. You can purchase oil futures on margin (in other words, you can borrow money to purchase them). The margin requirements are set by the exchanges and for oil they are often as low as 5% of the value of the investment. That means you could buy $100,000 worth of oil futures for only $5,000. This can also be very dangerous, but it is nice to at least have options.
- Limited supply. Oil is an irreplaceable resource. The fact that there is a finite supply is depressing for most people, but it can work to the advantage of investors who choose to invest in its futures. Other commodities futures such as corn and livestock can be replaced and their prices can be stabilized. However, as the world’s oil supply is exhausted, the price of oil will inevitably increase.
- Easy trading concept. Although it is a good idea to work with a broker or trader who can show you the ropes of futures investing, it is relatively easy to get started. Anyone who takes a little time to research the process can figure it out and develop a trading strategy.