I was trying to explain leverage using futures to my wife. I used terms like Notional and Big Point Multiplier. She didn’t get it. She asked me, where did you come up with this phantom number, and what does notional mean, what’s a multiplier? And she went on and on, finally I said ok, OK …I get it.
I was mired in my own world, and forgot how simple this topic really is, and it should be explained that way, simply.
So, in its simplest terms, compared to stocks, you can control more stuff with less money using futures, a lot more, like up to 10 times more!
My whole goal in trading is to make more with less. If I can make a lot of money, using very little of my own money, then my risk is lower, and I can seize more opportunities.
For example, if I had $10,000 to invest and wanted to speculate on buying gold, because I felt the market was getting nervous, and when it gets nervous, that usually means people flock to gold as a safe haven, driving the price up.
So, I would like to take my opinion to the market and control as much gold as I possibly could. In todays market I have 3 options; I can buy the physical gold (no leverage, $10,000 worth of gold), I could buy an ETF, which is just like a stock, like the GLD (a popular ETF ticker symbol for gold), which lets you control about two times the value you put into it, according to Regulation T*, so about $20,000, or I could buy a couple gold futures.
I could get 2 contracts with my $10,000. Each gold contract controls 100 ounces of gold, or about $117,000 by todays price. So with futures, I could control nearly 1/4 million dollars worth of gold for that same $10,000.
Damn! That’s a no brainer! And a lot of gold.
