Futures trading for beginners-WWNEED.COM
What are futures contracts and how are futures contracts traded? Here’s everything you need to know about these contracts and how to trade them.
A forward contract is an agreement to buy or sell an asset at a future date at an agreed price. This asset could be soybeans, coffee, oil, individual stocks or ETFs, cryptocurrencies, and a host of other assets. Futures contracts are usually traded on an exchange; Where one party agrees to buy a certain amount of assets, and receive them on a certain date. In exchange, the selling party to the contract agrees to provide them.
The futures market can be used by multiple types of financial actors, including investors and speculators as well as companies that actually want to physically receive or supply a commodity. These assets include a wide range of commodities and products. Oil, for example, is a commodity that can be traded in futures contracts. Investors can also trade S&P 500 index futures as an example of investing in stock futures.
What are futures contracts?
Futures contracts, which you can easily buy and sell on exchanges, are often standardised. Each futures contract will typically specify all of the various contract parameters, which include:
Measruing unit.
How the trade will be settled: either by physical delivery of a certain quantity of commodities or assets, or by cash settlement.
The quantity of goods or assets to be delivered or covered under the contract.
The currency unit in which the contract is denominated.
The currency in which the forward contract will be executed.
Grade or quality considerations, where applicable. For example, this could be a particular octane of gasoline or a particular purity of metal.
If you are planning to start trading futures, be careful as you do not want to opt for physical delivery of assets. Most casual traders, like you, don’t want to be bound to sign for trains of cows when the contract expires and then try to figure out what to do with them.
How do futures contracts work?
Futures contracts allow players to lock in a specific price and protect themselves against the possibility of extreme price swings (up or down) in the future. To illustrate how futures contracts work, let’s take jet fuel as an example:
An airline that wants to fix jet fuel prices to avoid unexpected increases can buy a futures contract that agrees to buy a set amount of jet fuel for future delivery at a set price.
A fuel distributor may sell a futures contract to ensure that it has a stable market for the fuel to protect against an unexpected drop in prices.
The parties agree to specific terms: buy (or sell) 1 million gallons of fuel, and deliver it in 90 days, at $3 a gallon.
In this example, both parties are hedged, as the first party includes real companies that need to trade the underlying commodity because it is the basis of their business. They use the futures market to manage their exposure to price changes.
But not everyone in the market wants to exchange a product in the future. It is often the people who seek to make money from price changes in the contract itself who are selling this type of contract. If the price of jet fuel goes up, the futures contract itself becomes more valuable, and the owner of that contract can sell it for more in the futures market. These types of traders can buy and sell futures contracts, with no intention of taking delivery of the underlying commodity; They are only in the market to bet on and profit from price movements.
With speculators, investors, hedgers and others buying and selling on a daily basis, there is a broad and active market with relatively good liquidity for these contracts.
Investing in stock futures
Commodities make up a huge part of the futures trading world, but it’s not just about hogs, corn and soybeans. Investing in stock futures allows you to trade individual company futures and ETF stocks. Futures contracts also exist for bonds and even bitcoin. Some traders like futures trading because they can take a large position (the amount invested) with a relatively small amount of cash out. This gives them greater access to leverage than simply owning the securities outright.
Most investors consider buying an asset expecting its price to rise in the future. But short selling allows investors to do the opposite, borrowing money to bet that the price of an asset will fall so that they can buy later at a lower price.
A common manifestation of futures contracts is the stock market in the United States. A person who wants to hedge exposure to a stock might short a futures contract on the Standard & Poor’s 500. If the stock goes down, he makes money on the short, offsetting his exposure to the index. Conversely, the same investor might feel confident in the future and buy a long contract – and gain a lot of upside if stocks rise.
Risks of investing in these contracts
Many speculators borrow a large amount of money to play in the futures market because it is the main way to magnify relatively small price movements for potential profits that are well worth the time and effort. But borrowing money also increases the risk: if the markets move against you, and you do so more dramatically than you expect, you could lose much more than you invested.
Leverage and margin rules are much more liberal in the futures and commodities world than they are in the stock trading world. The commodity broker may allow you to profit at 10:1 or even 20:1, depending on the contract. This is much higher than what you can get in the stock world.
The higher the leverage, the greater the winnings, but also the greater the potential loss. A price change of just 5 percent can cause the investor to have 10:1 leverage to gain or lose 50 percent of his investment. This volatility means that speculators need discipline to avoid excessively exposing themselves to any undue risk when investing in futures contracts.
If that risk seems too high and you’re looking for a way to change your investment strategy, consider investing in options instead.
Futures trading
It is relatively easy to get started with futures trading. First open an account with a broker that supports the markets you want to trade. The futures broker is likely to ask you about your investment experience, your income, and your net worth. These questions are designed to determine how much risk the broker will allow you to take on, in terms of margin and positions.
There is no industry standard for commission and fee structures in futures trading. Each broker offers various services. Some offer a great deal of research and advice, while others will give you quotes and some charts.
Some sites will allow you to open a dummy trading account for training. In it, you can practice trading using “virtual money only” before depositing real dollars to make your first trade. This is an invaluable way to check your understanding of the futures markets and how the markets, leverage and commissions interact with your portfolio. If you are just starting out, we highly recommend that you spend some time trading in a virtual account in order to be sure that you will work with it.
Experienced investors often use virtual trading accounts to test their strategies and choose the most suitable for them. Some brokers may allow you to access a full suite of analytical services in a Virtual Account.
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