Futures Trading. Its Characteristics, How it Works, and Benefits
Futures are contracts that give the buyer of a contract an obligation to buy or sell at a fixed price on a specific date. Futures contracts can be traded in many different markets, including commodities, currencies, and interest rates.
The most common type of futures is for commodity prices such as oil, gold, silver, corn, soybeans, etc. These types of futures have been around since the early 1900s, when they were first introduced by farmers who wanted to hedge against fluctuations in crop prices. In addition to these traditional futures products, financial futures allow investors to speculate on changes in stock market indices like Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite Index.
There are two main categories of financial futures: equity index futures and currency futures. Financial futures are used primarily by large institutional traders because their size allows them to take advantage of small moves in exchange rate movements. For example, if you want to bet 100 million dollars on whether the yen will rise versus the dollar over the next year, it would cost about 1 billion dollars to do so with physical cash. However, using futures could reduce this amount down to just under 10 million dollars. This means that even though the trade costs more than buying the actual currency itself, the potential profit from trading futures makes up for the difference.
Characteristic of Futures Trading
The characteristics of future trading include:
A trader must decide on the expiration date of the contract. If he does not determine what position to hold until after the expiry time, he has no choice but to close out his position.
When making decisions regarding positions held in futures contracts, one should consider both the current value of the underlying asset and its expected future performance.
One may use leverage to increase exposure to risk without increasing capital requirements. Leverage refers to borrowing money to purchase additional shares of the same security. Margin is required only during periods where the share price declines below the strike price of the option.
Options protect adverse movement in the underlying instrument. They enable a trader to limit losses while still being able to benefit from any gains.
Futures contracts are standardized instruments that facilitate easy comparison between buyers and sellers.
Futures exchanges offer liquidity through bid/ask spreads. Bid-offer spread represents the minimum price differential between bids and offers. It is usually expressed as percentage points above or below the prevailing spot price.
Futures exchanges typically charge transaction fees based upon the number of contracts involved.
Futures transactions involve the delivery of the underlying product. Delivery occurs either physically or electronically.
Futures contracts expire according to specified dates. At maturity, all outstanding contracts become settled, and final settlement values are determined.
Futures traders are subject to margin calls. Margins are calculated daily and adjusted accordingly.
Futures are priced relative to other similar assets. Therefore, the pricing mechanism is transparent and easily understood.
Futures trading involves hedging strategies. Hedges help protects against unexpected events that might affect the price of an underlying asset.
Futures can be bought or sold short. Shorting entails selling borrowed securities and replacing them later with new ones purchased at lower prices. Buying puts the investor the right to sell the underlying asset at a predetermined price within a certain period. Puts are often referred to as insurance policies.
Futures options are derivatives whose payoffs depend on the outcome of some event occurring before expiration. Examples include call options, put options, and straddles.
Futures contracts can be written on stocks, bonds, foreign currencies, precious metals, agricultural goods, energy sources, indexes, interest rates, and various combinations thereof.
Futures can be traded individually or combined into portfolios called baskets. Basket traders buy and sell multiple futures contracts simultaneously. The basket’s net cost depends on how much each contract expenses compared to the total amount invested.
There are two types of futures: cash forwards and physical commodities. Cash forward contracts allow investors to speculate about the direction of stock market movements over a fixed period. Physical commodity futures give speculators access to raw materials such as oil, gold, silver, copper, wheat, corn, soybeans, etc.
Futures exchange members must meet strict regulatory requirements before becoming eligible to trade futures products. These rules ensure fair competition among participants.
A futures exchange member may not accept orders if it does not possess sufficient capital reserves to cover its obligations under those orders. This requirement ensures that no one person has too large a share of the market.
How Does Trading Futures work?
The process begins when you place your order through our website. We will then match up buyers and sellers in real-time using algorithms developed specifically for this purpose. Once matched, we will send out confirmations via email. You should receive these emails shortly after placing your order. If you do not see any confirmation messages from us, please check your spam folder.
Once confirmed, we will begin processing your order immediately. Our system automatically calculates the best possible execution rate for your order. When all parties agree upon terms, we will execute your transaction. At this point, we will notify you via e-mail once your order is complete. Please note that there may be times where we cannot find matching bids and offers. In this case, we will contact you directly to let you know what happened.
If you would like to cancel your order, simply log back onto our site and click “Cancel Order.” Your cancellation request will be processed immediately.
What Are Some Benefits Of Using An Online Brokerage Account For Trading Futures Contracts?
There are many benefits associated with trading futures contracts online. Here are just a few examples:
1) No commission fees – Unlike traditional brokers who charge commissions based on the size of trades, an online brokerage account charges only a flat fee per month regardless of whether you make small or big transactions.
2) 24/7 customer service – Whether you need help during regular business hours or at night, day or weekend, you can always reach our support team. They are available to assist you whenever needed.
3) low minimum deposit amounts – Many brokerages require customers to invest thousands of dollars upfront. However, some companies offer low initial deposits ranging between $50-$100 depending on which product you choose.
4) Free training – Most online brokerages provide free tutorials so new traders can learn how to use their services effectively. The company also offers live webinars every week to teach people more advanced strategies.
5) Accessibility – With most online brokerages, you have instant access to your accounts anywhere in the world. All you need is an internet connection and a computer!
6) Security – Since online brokerages operate over the Internet, they are protected by firewalls and other security measures designed to prevent unauthorized users from accessing sensitive information.
7) Flexible payment options – There are several ways to pay for your monthly subscription, including credit cards, bank transfers, wire transfers, PayPal®, and even Bitcoin™.
8) Lower costs - Because online brokerages don't incur overhead expenses such as rent, utilities, etc., they pass those savings to clients. This means lower prices for everyone involved.
9) More control – Traders often complain about having no say in choosing their investment strategy. But since online brokerages allow them to trade without restrictions, it gives them full autonomy.
10) Better rates – As mentioned earlier, because online brokerages don't spend money on advertising, marketing campaigns, office space, etc., they're able to negotiate better deals with banks and financial institutions.
The cons of using an online brokerage include:
1) A Limited number of products offered – While most online brokerages offer stocks, bonds, ETFs, commodities, forex, indices, mutual funds, options, CFDs, swaps, and others, not all of these instruments are suitable for all types of investors. If you want to diversify your portfolio, then you should consider opening multiple accounts.
Future Trading Online has become one of the best platforms for individuals looking to start investing today. It offers excellent features that will appeal to both beginners and experienced traders alike. For example, its mobile app allows you to manage your investments wherever you go. In addition, there's no limit on the number of assets you can hold. You can open up to 100 different positions simultaneously. And if you ever get stuck, FutureTrader’s Customer Support Team is ready to answer any questions you may have.