Trading futures involves buying and reselling assets at a future date. Future contracts can include all those stuff you have seen people trade, including oil and currencies. Future contracts are agreements traded on an exchange, where one party agrees to buy an asset and resell it at a future date. Various financial players can use future markets, including companies specializing in the supply and delivery of physical commodities, speculators, and investors.
How Future Contracts Work?
Future contracts are designed to protect players against price swings. However, not all players in the futures markets want to resell their commodities in the future. These are speculators and investors who want to capitalize on the changes in the contract price. For example, the value of a futures contract is expected to rise with the increase in jet fuel price, and the owner of the contract can resell it at a profit. Speculators and investors are in the market to take advantage of price swings and can buy and sell commodities with no intention to deliver them at a future date. Futures markets are made relatively liquid and lively by hedgers, investors, and speculators who trade their futures daily.
People have often mistaken commodities for futures. The futures-trading world isn’t all about entities such as soybeans, corn, and hogs. These are just a big part of futures markets. The futures market allows trading of even individual bonds, shares, stocks, and cryptocurrencies such as bitcoin. Futures are an attractive investment that will enable investors to put up a small amount of money and take a substantial position. Futures give investors greater leverage potential than owning stocks or bonds.
Speculators often buy an asset anticipating its value will rise in the future. Futures contracts offer an application that allows speculators and investors to short-sell a commodity to balance out exposure to stocks. Speculators can hedge exposure to index by short-selling their futures if the price of their stock falls. The same speculator can rebuy those futures and hold them until their price moves upwards.
What to Expect in Futures Contracts
Standardized futures contracts can be bought and sold over exchanges. However, each futures contract spells out its specific contract parameters, including the measurement unit. A futures contract can also stipulate how the trade will be settled. Futures settlements are often done through cash or delivery of a physical commodity.
Tricks to Trade Futures Contracts
Starting to trade futures contracts is straightforward. It begins with opening an account with a trading platform supporting commodities or services you want to trade. It is quite normal for futures brokers to enquire about your net worth, income, and experience with trading. These are the questions that guide brokers in determining the risk margin that you can take. Futures trading imposes no standards for fee structure and commission. Some brokers allow you to practice with a virtual account before investing in a real account. Virtual accounts are an invaluable way to gauge your understanding of how the futures market works. Experts recommend beginners to spend time trading virtual dollars until they understand how futures are traded. Even experienced traders sometimes use virtual accounts to test a new trade strategy. Take advantage of brokerage firms that allow traders to access analytical tools in virtual accounts.
Virtually everyone gets into futures trading hoping to amass wealth and speculate correctly. However, you must be willing to learn how this dynamic market works. Futures aren’t traded like bonds and stocks; instead, they trade in contracts. The exchange that futures trade is responsible for setting the size of each futures contract. For example, if the contract size is 1000 ounces, a trader with one contract will be controlling 1000 ounces of that futures. So, a $1 rise in the price of gold would affect a futures’ position by $1000 ounces. But note that each futures contract or commodity is unique, and its prices can vary.