Risks of Futures Transactions
Trading futures contracts may not be suitable
for all investors. You may lose a substantial
amount of money in a very short period of time.
The amount you may lose is potentially unlimited
and can exceed the amount you originally deposit
with your broker. This is because futures
trading is highly leveraged, with a relatively
small amount of money used to establish a
position in assets having a much greater value.
If you are uncomfortable with this level of
risk, you should not trade security futures
contracts.
General Risks
Trading futures contracts involves risk and may
result in potentially unlimited losses that are
greater than the amount you deposited with your
broker. As with any high risk financial product,
you should not risk any funds that you cannot
afford to lose, such as your retirement savings,
medical and other emergency funds, funds set
aside for purposes such as education or home
ownership, proceeds from student loans or
mortgages, or funds required to meet your living
expenses.
Be cautious of claims that you can make large
profits from trading futures contracts. Although
the high degree of leverage in futures contracts
can result in large and immediate gains, it can
also result in large and immediate losses. As
with any financial product, there is no such
thing as a “sure winner.”
Because of the leverage involved and the nature
of futures contract transactions, you may feel
the effects of your losses immediately. Gains
and losses in futures contracts are credited or
debited to your account, at a minimum, on a
daily basis. If movements in the markets for
futures contracts or the underlying assets
decrease the value of your positions in futures
contracts,
You may be required to have or make additional
funds available to your carrying firm as margin.
If your account is under the minimum margin
requirements set by the exchange or the
brokerage firm, your position may be liquidated
at a loss, and you will be liable for the
deficit, if any, in your account.
Under certain market conditions, it may be
difficult or impossible to liquidate a position.
Generally, you must enter into an offsetting
transaction in order to liquidate a position in
a futures contract. If you cannot liquidate your
position in futures contracts, you may not be
able to realize a gain in the value of your
position or prevent losses from mounting. This
inability to liquidate could occur, for example,
if trading is halted due to unusual trading
activity in either the futures contract or the
underlying asset; if trading is halted due to
recent news events involving the underlying
asset; if systems failures occur on an exchange
or at the firm carrying your position; or if the
position is on an illiquid market. Even if you
can liquidate your position, you may be forced
to do so at a price that involves a large loss.
Under certain market conditions, it may also be
difficult or impossible to manage your risk from
open security futures positions by entering into
an equivalent but opposite position in another
contract month, on another market, or in the
underlying security. This inability to take
positions to limit your risk could occur, for
example, if trading is halted across markets due
to unusual trading activity in the futures
contract or the underlying asset or due to
recent news events involving underlying asset.
Under certain market conditions, the prices of
futures contracts may not maintain their
customary or anticipated relationships to the
prices of the underlying asset or index. These
pricing disparities could occur, for example,
when the market for the futures contract is
illiquid, when the primary market for the
underlying asset is closed, or when the
reporting of transactions in the underlying
asset has been delayed. For index products, it
could also occur when trading is delayed or
halted in some or all of the securities that
make up the index.
You may be required to settle certain futures
contracts with physical delivery of the
underlying asset. If you hold your position in a
physically settled asset futures contract until
the end of the last trading day prior to
expiration, you will be obligated to make or
take delivery of the underlying asset, which
could involve additional costs. The actual
settlement terms may vary from contract to
contract and exchange to exchange. You should
carefully review the settlement and delivery
conditions before entering into a futures
contract.
You may experience losses due to systems
failures. As with any financial transaction, you
may experience losses if your orders for futures
contracts cannot be executed normally due to
systems failures on a regulated exchange or at
the brokerage firm carrying your position. Your
losses may be greater if the brokerage firm
carrying your position does not have adequate
back-up systems or procedures.
All futures contracts involve risk, and there is
no trading strategy that can eliminate it.
Strategies using combinations of positions, such
as spreads, may be as risky as outright long or
short positions. Trading in futures contracts
requires knowledge of both the asset and the
futures markets.
Day trading strategies involving futures
contracts and other products pose special risks.
As with any financial product, persons who seek
to purchase and sell the same security future in
the course of a day to profit from intra-day
price movements (“day traders”) face a number of
special risks, including substantial
commissions, exposure to leverage, and
competition with professional traders. You
should thoroughly understand these risks and
have appropriate experience before engaging in
day trading.
Placing contingent orders, if permitted, such as
“stop-loss” or “stop-limit” orders, will not
necessarily limit your losses to the intended
amount. Some regulated exchanges may permit you
to enter into stop-loss or stop-limit orders for
futures contracts, which are intended to limit
your exposure to losses due to market
fluctuations. However, market conditions may
make it impossible to execute the order or to
get the stop price.
You should thoroughly read and understand the
customer account agreement with your brokerage
firm before entering into any transactions in
futures contracts.
You should thoroughly understand the regulatory
protections available to your funds and
positions in the event of the failure of your
brokerage firm. The regulatory protections
available to your funds and positions in the
event of the failure of your brokerage firm may
vary depending on, among other factors, the
contract you are trading and whether you are
trading through a securities account or a
futures account. Firms that allow customers to
trade futures in either securities accounts or
futures accounts, or both, are required to
disclose to customers the differences in
regulatory protections between such accounts,
and, where appropriate, how customers may elect
to trade in either type of account.
