Trading Products to Consider

(photo by Patrick Weissenberger on Unsplash)

In today’s world of investing, there are a variety of products that are offered to the individual investor in which to trade, such as individual stocks, stock options (topic in a future post), ETFs, Futures, and Micro Futures. In today’s blog, I will provide an overview of each of these products.

INDIVIDUAL STOCKS

Most investors are familiar with individual stocks, such as Apple (AAPL), Nike (NKE), JP Morgan (JPM). Some stocks can be volatile, such as technology and biotech stocks. Others may be less volatile such as bank and chemical stocks. While stock prices do fluctuate a lot, if held for the long-term, stocks tend to drift higher.

EXCHANGE TRADED FUNDS (ETF)

Another product that can be bought and sold like an individual stock is an Exchange Traded Fund (ETF). An ETF is a type of security that tracks an index (i.e., S&P500), sector (i.e., technology), commodity (i.e., gold), or other asset. A well-known index ETF is the SPY, which tracks the S&P500.

The S&P500 is a stock market index that tracks the performance of 500 large companies listed on the U.S. stock exchanges. This is the broadest and most used index as it represents 80% of all U.S. stocks. While ETF prices also fluctuate, because it tracks a group of stocks (or other asset groupings), the volatility of one stock will not cause as much of a dramatic change in the ETF price as holding a single individual stock might.

FUTURES CONTRACTS

ETFs and individual stocks can only be traded during regular trading hours of 9:30am to 4pm EST, plus one hour before and one hour after; so technically from 8:30am to 5pm EST.

However, FUTURES are open during extended trading hours, up to twenty-five hours a day, five days a week. The majority of FUTURES start trading at 6pm EST on Sunday, and close on Friday afternoon between 4:30-5:00pm, depending on the commodity. And trading will stop for 30-minutes to 1-hour each day, at the end of the business day.

Similar to ETFs, there are a variety of FUTURES products to choose from. FUTURES may track an index (i.e., S&P500), commodity (i.e., gold), or other asset. I will delve into other futures products another time. Today, let’s stick to just one of these futures products, the S&P500 Futures Contract, also known as /ES (slash-ES). Also, there is a smaller MICRO-FUTURE that has the ticker /MES (slash-MES).

S&P 500 Futures are closely followed by all types of investors and the financial media as an indicator of market movements. Investors can use S&P 500 Futures to speculate on the future value of the S&P 500 by buying or selling futures contracts.

One big difference between Stocks/ETFs and Futures is how much the product moves for each point up or down. In the examples below, I refer to “one share” when referring to Stocks/ETFs; and to “one contract” when referring to Futures. For purposes of this discussion, think of shares and contracts as the same thing.

Stock Example: Apple is currently trading at $149. If I buy one share of Apple at $149 and it goes up one point to $150, I make $1. And of course the opposite is true, that I would lose $1 if the stock goes down one point. The same case holds true for ETFs.

/ES Example: One point moves in the /ES Futures are worth $12.50 per contract (versus the stock $1). So the /ES moves faster than a stock. I can make more money or lose more money quicker by trading the /ES product. This product moves fast, so it may not be appropriate for many individual investors.

/MES Example: One point moves in the /MES Futures are worth $1.25 per contract (versus the stock $1). This is a much more reasonable price for the average investor. I use this product myself.

CONSIDERATIONS

Stocks and ETFs have “overnight risk”. Because we can only trade stocks/ETFs during regular trading hours, it is possible that negative news is reported overnight on a stock we own, causing the stock price to drop before the market opens the following day. Or a stock price may fluctuate dramatically when a company reports quarterly earnings results after the market closes. If earnings are great or horrible, the stock may move sharply up or down before the market opens the following day.

Some investors trade Futures for the purpose of minimizing risk in their stock portfolio. For example, the stock market is currently at all-time highs. If I own several stocks that I have held for a long time, my stock portfolio reflects a large unrealized gain. I can choose to sell a portion of my stocks now and lock in gains. Or I can continue to hold my stocks, and hedge my portfolio by shorting some /MES Futures Contracts, for example. In this scenario, if the stock market drops, my stock portfolio will drop in value. But I will earn back a portion of stock losses with my short position in /MES.

CONCLUSION

Many investors diversify their portfolios by investing in stocks from various sectors and industries (i.e., technology, banks, chemicals, etc.). Today, many types of products are now available in addition to just stocks, such as stock options (topic in a future post), ETFs, Futures, and Micro Futures. These new product offerings can be added to your own stock portfolio to add a layer of diversification, and to even protect a percentage of your stock portfolio from inevitable market down turns. By paying attention to the trends in the market, we can assess where and how to invest our money wisely. Good luck!