Most investors use basic investment products to invest in an Individual Retirement Account (IRA). Stocks, bonds, and mutual funds make up a large percentage of IRA holdings, but some curious investors ask, “What else can be traded in an IRA?” One answer for more sophisticated investors might be futures.
Futures in an IRA can provide qualified account owners with access to markets and asset classes not traditionally traded. Futures can deliver a variety of choices: energy markets (crude oil), interest rates (bonds), metals (gold and silver), agriculture (soybeans and corn), equities (E-mini S&P 500), and foreign currency (euro, yen, pound)—they can all be accessed via futures contracts.
Trading these products via futures contracts can help diversify a portfolio and give an investor certain advantages. For example, did you know that futures contracts provide virtually 24-hour access to trading markets? Some of the most active futures contracts provide deep liquidity.
The Future Is Different
The potential benefits of trading futures in an IRA might be clear. However, it’s important to understand the differences and intricacies of the futures markets versus more traditional securities. The biggest difference between stocks and futures is the finite life of a futures contract. A stock can be purchased, placed in an account, and held for the long term. In contrast, a futures contract is a much more attentive trade; at some point, the futures contract will expire and cease to exist. (Learn more about futures settlement.) The futures contract can be closed or rolled to the next expiration cycle using a spread strategy to extend duration, which is a common practice among futures traders.
The next difference is the tick value. A tick represents the minimum price movement of a futures contract. Again, futures are a more attentive trade and one reason is because futures contracts have different tick values and tick sizes. Good news! All the tick sizes and values can be easily found on the futures tab within the thinkorswim® platform. Although it may seem confusing at first glance, the values will become second nature as you expand your futures trading knowledge and experience over time.
Finally, futures contract symbols are formatted differently than other symbols. The forward slash (/) identifies the product as a futures contract. For example, /CL represents crude oil futures. If you forget that forward slash, you’ll get CL (Colgate-Palmolive) instead of crude oil, so it’s important to remember your slashes. The two letters after the forward slash identify the futures product; the third value identifies its expiration month; and finally, the numbers represent the expiration year. So, for example, /ESM6 stands for the E-mini S&P 500 Index futures contract that expires in June 2016 (see figure 1).
If you’re a TD Ameritrade client, you can log in to the thinkorswim platform and ask questions about futures in Swim Lessons every business day from 10:30 a.m. to 12:00 p.m. CT. Come join me and Scott Connor as we educate clients daily on options and futures trading.
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The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.