You might be getting your feet wet by entering the stock market, and you may not know where to start. E-minis may be an option you want to consider, and the following guide will show you why this may be the right choice.
What Are E-Minis?
E-minis are simply fractured small future contracts on a particular stock. There are several available e-minis that you can choose from. All the different e-minis relate to different types of stocks, but the main difference between e-minis and any other stock option is that they are quite affordable.
Consider the following:
Remember that e-minis are inexpensive? The reasons is they have low margins or low collateral to cover the credit risk that is being taken. You are essentially taking a small risk, and the company itself is taking a small risk by selling to you as well. It is a good place to start.
Avoid Overall Correlation
Another good thing about trading e-minis instead of larger contracts is that an e-mini is less affected by the overall stock market. Every stock correlates to the overall fluctuations in prices. This means that to make wise decisions you have to do a lot more research to understand the entire market. E-minis operate almost on their own, meaning that you just have to understand the e-minis that you choose to work with.
A problem that is common with many stock options is their liquidity; you won't be able to sell and collect cash quickly. You may be stuck with these options for months before you find an opportunity to sell. This is an issue that you shouldn't see with e-minis. E-minis trade daily, and by the millions, meaning that you can get paid much quicker than other options.
Another good thing about e-minis is that you won't have to pay too much of your gain back when you file your taxes. E-mini future gains are split 60 to 40 percent. This means that 40 percent of your gains will be taxed as short-term gains and will be taxed at your regular income tax rate, which could be 35 percent. And the 60 percent gain is counted as long-term gains, which are taxed at 15 percent. These numbers do depend on your gains and your tax bracket.
You can talk to your e-mini specialist about other benefits of trading e-minis. But, as you can see, there are a few sensible reasons why you should start with e-minis.