Future trading is not for beginners, it requires experience of even the most advanced traders. It is a type of trading that is available in different markets and has applications and platforms that give you a channel to trade in the future. For something that doesn’t seem to be related to stock and products, what exactly is the future, what is the purpose and what should you enter into it? We’ll find out.
What is futures trading? – Breakdown
What is futures trading? You can’t start investing hard-earned money in something you don’t understand, so we’re going to give you a quick breakdown.
Futures are derivative financial contracts. What does a derivative mean? In the case of trading, it is a contract that “generates” its value from a group of assets, an underlying asset or a benchmark. The two parties will enter into an agreement (hence the term) to agree on the purchase or sale of commodity assets or securities on a specific date in the future, for a price that has been set. Note that there is a minimum price fluctuation for each contract known as a “tick”.
These trades are made in the futures market or exchange. To participate in futures trading you will need a brokerage account that is authorized to do so.
You may think that it sounds like option trading and you will be fine, but there is a difference. At the end of the contract, there is no guarantee of the price of the options, but in futures trading, the buyer is obliged to purchase the asset and the seller is obliged to pay it.
Futures market
We have mentioned that futures are traded in the futures market. How are they different from other markets and exchanges? It’s just that it’s dedicated to the future. A general contract agreement contains information such as the amount the buyer promises to purchase and the delivery date for the seller. Examples of futures commodities include oil, metals, coffee, grain and even currencies such as cryptocurrencies such as bitcoin.
Break down the categories you might find in the futures market or in exchange for more examples.
Financial Future – E-Mini S&P 500, NASDAQ and Russell 2000, and Mini Dow Jones.
Currency Futures – Many world currencies such as AUD, CAD, British Pound, Yen, USD
Energy Future- Natural gas, oil, ethanol
Metal Futures – Gold, platinum, silver, copper, palladium
Livestock Futures – Cattle for eating such as cattle
Food Future- Coffee, sugar, cheese
Grain Future – Corn, soy, wheat, oats
Future – How does it work?
Is trading futures divided into just a few steps?
Take fuel, for example, since prices are astronomical at the time of writing. Suppose a power corporation like Chevron and Shell wants to set prices and avoid potential future growth. The corporation will become the buyer, looking for a contract from the seller, who will be the fuel distributor, who says the amount fixed for a set price that will be delivered at a certain time in the future.
Stock futures
We’ve talked about the various products available in Futures Trading, but there are also stock options that you can’t deal with. Individual companies like some ETFs may also have futures stocks. You can even find futures bonds.
Most of us have a laid back attitude when it comes to painting a picture about ourselves. However, others do short-selling, which is actually a gain with a stock fall.
Future agreement
We have explained what futures contracts are, but let’s go into more detail about what is set out in each.
- How to trade (physical delivery, cash, etc.)
- Quantity of product
- Coin
- Product details such as grade, quality etc.
- Unit of measurement
What is the purpose of the future?
A big and probably primary reason to trade futures is to hedge against the potential risk of price change. This is one of the best ways to do this for large corporations. So, risk management is a big part of it, but the other half is about estimating.
One thing to understand before the deal ends, futures trades are extremely fluid and can change hands. Why this matter? This is a great feature for those who do not plan to own a product. What such an investor does is gain from the market without being responsible for the follow-through.
Anyone who buys and sells before the expiration date will have no obligation to meet the terms of the agreement. This is complicated, which is why we do not recommend futures trading for beginners. However, if you want to go into the future and be open to learning and spending time on it, TopstepTrader is a great option. You can also consider NinjaTrader or Forex.com, but you can try the free trial for TopStepTrader first and then decide.
Future trading – good and bad
The best way to determine which type of trading or investment is right for you is to consider the pros and cons.
Professional
- Diversify your investor profile by spreading assets across different types of investments
- Participate in short sales
- Potential tax benefits
- Speculation due to high liquidity
- Risk management
- Deposits are usually a fraction of the total amount
Cons
- Success requires investment and trading knowledge
- Margins open up more risks with more profit opportunities
Advantage
We talked about all the good things that come with futures trading, from risk management to short selling. If you meet the criteria for going through futures trading, you can reap all the benefits if you understand this.
A brokerage will probably ask about your investment experience, your total net worth and even your income margin and the risks they will allow you to deal with. Commissions and fees are set by the brokerage and will vary. It also depends on the services they provide. There are some organizations that offer lots of support and advice.
Risk
The futures market is very attractive to those who want to invest a small amount, especially through small sales. We see in day trading people who just borrow money to play in the futures market. While it is true that you can gain a lot, the opposite is also true and you can lose a lot.
The Commodity Futures Trading Commission (CFTC) warns of the volatility of individual investors and makes recommendations against it for those who have no capital or experience. Again, there are platforms to use that can give you a taste of futures trading without the risk of going it alone.
The final word
The point we are trying to make throughout this article is that futures trading is a very lucrative form of investment to hedge against future price increases and to make a lot of money through a small initial investment in short sales. It is also important to acknowledge the underlying risks of futures trading, which can equate to high profits and high losses.