When it comes to trading futures, it is vital to know what it stands for. A futures agreement is when the buyer and the seller decide to sell a certain asset at a specific date and price. It usually includes a previously established amount of commodities or securities. For example, if you are trading crude oil, it requires at least 1,000 barrels. On the other hand, when it comes to corn, you would have to sell at least 5,000 bushels.
They owe their popularity to farmers who wanted to avoid risks on the market. Between the planting and the harvest, prices can easily change, and this allows them to sell their assets securely. However, investors use these agreements as a way to speculate the direction of the assets movement in the trade market.
When they first appeared, traders often used futures agreements for agricultural commodities. Those included livestock and grains. However, now there is a wider variety of securities.
For example, today, you can trade gold, aluminum, energy, bonds, and even stocks. These agreements have a standardized form, and they are used all over the world. Some of the best-known futures exchanges include Chicago Mercantile Exchange and the Intercontinental Exchange.
Futures Market Participants
Participants in the futures trade market can trade equity indices, as well as futures contracts. These are especially popular because there is higher leverage on them. However, this has its disadvantages as well. Even though there is a greater potential to achieve a higher profit, the risk is also substantial. That means that there are significant losses if the trader does not know the basic futures trade mechanics. Therefore, it is vital to research important factors beforehand.
The term “contract” may seem too serious. However, it is necessary when it comes to futures trading. It is a legal binding contract that protects both parties, and it features a standardized form. However, neither party has to hold the contract until its expiry. They can exit it or offset their position whenever they want. But, they have to do it before that date.
Furthermore, there are many traders who only hold the contract for a few hours or minutes. They are called day traders.
All futures traders fall into two categories. They could either be speculators or hedgers.
Hedgers use the futures in order to protect their businesses. There could be great losses if the prices change drastically. This is why they can lock-in favorable pricing on things that they businesses depend on.
In contrast, the speculators are not tied to a specific business. They are looking for a way to profit from the price changes. The contracts are vital for them because they offer key benefits on the market. Furthermore, for speculators, the profit potential is higher because the futures markets are usually quite unpredictable.
If you are looking into futures trading, then this guide will be useful to you. We wanted to make your life easier, and that is why we will cover a variety of topics. You will learn how they work, the difference that sets them apart from other market instruments, and pros and cons of having them. We will also help you understand what you have to consider before delving into the futures market. In addition to that, you will learn how to evaluate them, and there will be a practical example of a futures trade.
Knowing how the market and the futures exchange work is essential if you are considering selling or buying these kinds of assets. Here are some basic facts that will help you in your further research.