In the financial industry, “futures” is most often used to refer to futures contracts. A futures contract stipulates the conditions for said cash settlement or delivery of a certain asset, such as equities, raw materials, or goods, at a future date. Futures are a type of derivative since the contract’s value is determined by the price of the underlying asset.
Futures, as opposed to options, call for contract settlement by the contract holder. That is the main distinction between options and futures. The contract holder is asked to settle the contract at a certain date, but they are not obligated to do so.
Additionally, futures contracts specify how the transaction will be resolved between the contract’s two parties. Investors can easily bet on the traded asset’s future value in the futures market thanks to standardized futures contracts. A futures contract for 3 months or over from the current date can be purchased by a speculator who believes that the price of a commodity will rise over the next months. Speculators can easily sell the contract when it is close to the execution date, ideally at a profit.
Here is everything you need to know about future contracts and trading.
How to Start Trading in Futures?
You must set up an account with a brokerage firm or broker who covers the marketplaces you want to trade to begin trading futures. Futures trading is a common service provided by all stock brokers but you must work with Top 10 Stock Brokers in India to get the best benefit.
However, they might inquire farther than they did when you opened a conventional stock brokerage account to acquire access to futures markets. The broker may inquire about your financial background, salary, and net worth to decide the level of leverage they are willing to permit. If the broker thinks it’s appropriate, very high leverage can be used to purchase futures contracts.
Broker fees for purchasing and selling futures differ. Make sure to shop around to discover the broker who meets your needs the best in terms of price and services.
You can choose the futures contract you want to buy or sell after your account is open. The initial margin for the contract, or the portion of the negotiated value you must put up in cash, will be decided by your broker.
During the trading day, the position is marked to markets after the day. This means that the broker calculates the position’s worth and adds or subtracts that sum in cash from your account.
You will be asked to add additional funds to the account to fulfill the maintenance margin if the equity in your position is insufficient to meet the broker’s margin requirements.
You will probably need to close your investment before expiration to avoid getting delivery of the underlying asset. If you want to retain your position until it expires, several brokers have systems in place to do this automatically.
Characteristics Of Futures Contracts
- Different Asset Classes: Different asset classes could be included in a future contract. Futures are available for stocks, commodities, currencies, indexes, and other things.
- Margin Money: To trade a futures contract, investors must deposit margin money. However, the value of the contract as a whole is substantially less than this margin money. This makes it possible for investors to trade futures even with a little investment.
- Standardized Contracts: These contracts are standardized in terms of both quantity and quality. For example, a typical oil futures contract is for 1000 barrels. This implies that a trader would need to purchase ten contracts to transact 10,000 barrels of oil.
- Hedging: other than simply trading and making profits with these contracts, one can hedge them to mitigate the risk of other asset classes.
Who Participate In Future Trading?
- Hedgers: These investors are not in the futures trading business to generate a profit. Hedgers’ main goal is to protect themselves or their business from the unfavorable changes in the underlying commodity’s price.
- Speculators: They are the investors who have decided not to take possession of the underlying asset at expiration. Instead, they hope to make money off of changes in the underlying asset’s price before it expires. Speculators can be said to trade futures contracts similarly to how stock market participants do.
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Advantages Of Futures Trading
- Regulated Market: Before you start trading, it’s important to have confidence in your broker. The futures market is heavily regulated and controlled by just one exchange. With the help of this function, you can avoid interacting with brokers whose main concern isn’t your success.
- Low Barrier: Entry into the futures market is not difficult. This is made possible by the contract sizes’ flexibility. There are three different sizes of the same contract type: conventional futures contracts, E-Mini contracts, and Micro E-Mini contracts. This enables you to participate with any investment amount you like.
- Ample Diversity: Fiat currencies, commodities, and indices are all accessible through the futures market, each with a different time expiration. For traders, this diversification opens up a wide range of options to engage in their preferred activities.
- Minimal Fees: Fees must be paid when trading, however in the futures market they are often quite low, ranging from $0.25 to $1 per contract. This is beneficial in the futures market, where the typical trader executes several-day deals daily. Because the futures market frequently opens and closes at various prices, it is crucial to execute these daily deals. You can regularly close and reopen your investments to avoid overnight volatility.
Disadvantages Of Futures Trading
- Time Consumption: Since the futures market is active around-the-clock, its value will always fluctuate. Thus, day trading futures contracts require a substantial time commitment to market observation, which some traders may not want to or may not be able to commit.
- Time Decay: Traders frequently have trouble comprehending how time decay affects your contract. Your contract will start to lose value as time goes on since the price of yesterday’s oil will become less and less important as the contract’s expiration date approaches. As the expiration date approaches, a contract left unredeemed will continue to lose value.
Closing In Time: Knowing precisely what you are buying is the greatest obstacle to entering the futures market. The value, quantity, quality, and expiration date of a futures contract are among its parts. Cash or the physical asset itself may be used to pay your contract. Not closing in time means delivering the commodity or receiving it instead of in cash.
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