The Basics of Futures Trading

The Basics of Futures Trading

If you are looking to maximize your profits, consider futures trading. Futures trading involves buying and selling of assets at a preset future date and price. To protect your portfolio and make a clean profit, you can make use of future contracts. Let’s find out what futures contracts are.

Understanding Futures Contract

A futures contract refers to an agreement between a buyer and a seller that the purchaser will buy an asset at a future date and price that they have agreed upon. The system is beneficial to individuals who produce commodities and wants the prices locked. When you utilize futures trading to finance a commodity you require for production, it should arrive at your doorstep as physical delivery. You can also settle a futures contract in cash form. This means that the trader accepts any gains in cash form. The futures contract for bonds, currencies, market indices and stocks are settled in cash form.

Differences between Options and Futures Trading

If you are an options contract holder, you have the right to purchase a particular asset at a fixed price during a certain period. However, you do not have an obligation to purchase an asset. On the other hand, the seller and buyer of the futures contract have an obligation to transact.

Another major difference is that futures contracts need the daily settling of losses and gains. This means that as an investor, you will need to balance your accounts every day. This might appear like a small inconvenience; however, it might mean funding your account until the completion of the futures contract. On the other hand, you do not have such daily expenditures with options contracts.

Who Performs Futures Trading

There are four categories of futures traders, and they include the following.

•    Commercial traders whose positions for risk are contrary. For example, an ethanol distiller with concerns for rising prices may go long futures, while a farmer with concerns of falling prices may go short futures.

•    Investors are not involved in the direct consumption and production of underlying assets in futures contracts. These are individuals whose aim is to make a profit.

•    The third and fourth categories are professional traders, commodity trading advisors, and futures portfolio managers. These people are more focused on gains than production.

How Futures Trading is Regulated

Trading futures has tight regulations to make sure everything is overboard. In 1936, Congress passed a law on Commodity Exchange Act, and it has been serving ever since. Even though over the decades, the rules have changed because trading commodities have expanded. In the past, trading was for the agricultural sector only, but currently, there are various commodities, including gold and oil. The US government regulates futures trading. Futures trading makes use of leverage, meaning the investors make trades using loans.

Where to Trade Futures

Most online brokerages include a section for trading futures, so if you got an interest, familiarize yourself with the platform. Investors usually have access to margins that needs a certain amount of money in their account. You might also be required to pass a test or class before trading with the loan.

Risks of Futures Trading

Futures trading does not pay any dividend or interest. Futures trading does not have on balance any interest. They are just zero-sum games with two sides. One side of the transaction is the cost, while the other side pays the commission.

Finally, futures trading is a mechanism that helps the seller to avoid the effects of price swings which might lead to losses. Some individuals venture into futures trading intending to make profits. It is also essential to note that futures trading also has several risks.

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