E-mini index futures are liquid, meaning a large volume of contracts trade daily. And you want volume, because that means tight bid/ask spreads. Penny stocks are a great example of how low volume can hurt investors — but in short, it’s better to know that if you’re buying, someone’s selling for or very near the price you’re buying at, and vice versa if you’re selling. E-mini contracts trade at a clip of more than 2 million per day, so lack of liquidity isn’t an issue.
The E-mini index futures market is wholly electronic, which means there’s no one in the pits making markets — and that takes out the risk of personal preferences, like those of market makers on the NYSE or Nasdaq, who can delay the filing of or outright refuse your trade. It’s a first-in, first-out (FIFO) system, with no regard to the size of the trade.
You Can Go Short
Just like stocks, you can go long OR short on futures. Unlike stocks, there’s no restrictions. In 2008, amid the financial crisis, the U.S. put a temporary kibosh on short-selling financial stocks, and several European countries did the same for some of their banks while chaos ensued last year. Other permanent short-selling bans have been put in place — for instance, on naked short-selling, in which you short an asset without borrowing it first or ensuring it can be borrowed.
E-mini index futures are pretty much unchained because of the nature of the product. Index futures aren’t small bits of ownership in individual companies — they’re market products meant to capitalize on a constantly changing market. So short away!
The key word in “E-mini index futures contract” is “futures.” Because those are the rules by which you are taxed.
With stocks, you play by the rules. If you hold a stock for less than a year, it’s a short-term holding and is taxed just like ordinary income, within your income bracket. Only by holding onto a stock for more than a year do you get that sweet 15% tax rate for long-term capital gains.
E-mini index futures contracts, on the other hand, offer a 60/40 split on your bill to Uncle Sam: 60% of your trade is considered a long-term capital gain, while the remaining 40% is shuffled into “short-term” — regardless of how long you held the contract.
For taxation purposes, you’ll receive a 1099-B form from your broker. Let’s say you made $10,000 trading E-mini index futures — 60% of that ($6,000) can be claimed as long-term capital gains and will only be taxed at 15%, with just the remaining $4,000 taxed as short-term gains at your ordinary income rate.