Futures Trading

Basics of Futures Trading

A futures contract is a legal agreement between two parties always a buyer and seller to buy or sell an asset/security at the specific future date and price.

In futures trading a futures contract is a legal agreement between two parties always a buyer and seller to buy or sell an asset/security at the specific future date and price.

Every futures trading contract signifies a specific amount of a given security or commodity. It is just nearly similar to the options contracts in terms of usefulness when hedging or speculating.

When future contract traded in the regulated market, it pleases to buy or sell the stated security for the specific price on the expiry date.

If you buy a Corn-Dec future contract in Sep and paid the amount which was agreed on your agreement date then in December on the same price you will the delivery.

In futures trading all the listed products are structured by the exchanges, you can offload a position by buying and selling an opposing contract before the expiry/settlement date.

For the real manufacturers and growers futures trading provides and opportunity to hedge the risk. Like if this year bad crop of grapes is expected then wine makers will buy the future contract on today’s price and on the delivery date when price will be high due to bad crop, they will get the delivery on the same price which they paid when the hedge. On the other side speculators only enter to get benefit of price changes they are not concerned with the Crops situation after months.

A Futures Contract Will Always Stipulate

  • Market Being Traded

    The specific market which is being traded, Like Corn Dec, Wheat April are two examples of markets.

  • Date of the Trade

    The current date on which the transaction is completed or the current transaction date.

  • Price

    The price at which the market has to be traded, which is the current price of a future contract.

  • Volume of Transaction

    How much of the market has to be traded, Usually called lot size or units.

Two parties will involve in the settlement process when the futures contract expires. There are two possibilities the very first one is to deliver the product physically as the price was agreed earlier.

And the second option is to settle in cash while paying the difference on the amount. The exact different of amount form the transaction date to the delivery expiry date.

If we have a look at the broader prospect of futures trading than originally futures contracts are used by the commodity producers to guarantee the price of their product ahead of the sale.

But now a day’s commodity traders and commodity brokerage firms are also involved in this trading. When they hedge their real product there, they cover their risk and never experience loss.

As I discussed earlier the real objective of futures trading was to allow farmers to hedge the risk of agriculture product between planting and harvesting.

But producers and investors of all types are getting benefit front the futures trading. Futures trading also being used for the purpose of speculation where traders get the benefit of quick moves.

Global Future Exchanges

Future markets are the places where you can buy and sell futures contracts. The markets now include a wide variety of assets like precious metals, Indices, currency futures, bond, and stocks as well.

In the futures trading, the futures contracts are standardized contract agreements which are only traded in the exchanges around the world. The most knows exchanges are,

CME Group is the worlds learning future exchange, it was was established in 1848 as the world’s first futures exchange based in Chicago, USA. According to the trading volume in futures trading market this exchange is at the top position.

https://www.cmegroup.com

An NYSE listed company established in 2000 with the idea of creating an electronic market place, based in the USA.

https://www.theice.com

Operated by Deutsche Börse AG offers a wide range of future products.

https://www.eurexchange.com

This is also a biggest makret to trade offering a wide variety of future contracts/assets to trade. 

https://www.nseindia.com

B3 S.A. – Brasil, Bolsa, Balcão is one of the world’s largest financial market to trade futures Assets.

http://www.b3.com.br/en_us/

Every exchange is based in a specific country, future contracts are traded globally and due to nature, most the exchanges operate regional and branch offices around the world. In this digital market place, electronic trading makes it possible to access the markets from anywhere. There are brokers which are providing access to multiple markets through a single platform.

Futures Trading Exchanges are Self-Regulatory Bodies

These all exchange the self-regulatory organizations/bodies coupled with the oversight from a jurisdictional authority. For instance, Like the united states, CME Group operates as a self-regulatory organization/body while CFTC supervises the entire futures trading industry in the United States. Fair and transparent operations of futures market are the responsibility of the regulator.

Key Benefits of Futures Trading

Majority of trades who actively trade in the financial markets prefer to trade the futures because there ae some specific benefits it which are,

  • Leverage

    As you know well leverage will increase your Trading capital multiple times. To hold a futures contract, you will only need a fraction of your total contract value as a performance bond. Leverage makes it possible to hold a portfolio much bigger the capital you have to invest to open your trades. Leverage makes the futures trading risky too, learn to handle the risk before investing.

  • Going long or short

    You can make money in the both ways, like you can buy when you find that market will go up and sell when there are chances of downfall. Which always remain very good opportunity specially for stock trades as they can make money while selling contracts.

  • Liquidity

    It tends to be very liquid market. Due to this nature of futures trading market buying and selling opportunities always remain there. Lots of people buying and selling contracts at any given time which makes it highly liquid. In such market it easier to place orders quickly and price remain stable specially near the expiry of future contract. This is the reason speculators attract towards it.

Major Participants in Futures Market

  • Hedgers

    The real farmers, growers, and manufacturers who see a risk in the future, hedgers usually do not seek profits by trading futures contracts, especially commodities. They get involved in futures trading to stabilize the revenues or costs of doing business. They hold future contracts for a long time period.

  • Speculators

    There is no need to hold the futures contract until the expiry. Speculators are the trader who enters into futures trading market to get benefits of short price movement. They may hold a contract from one day to week, usually, their holding time is short. Speculators are interested in the possession of the assets; they essentially place bets on the future contract’s prices. They are often blamed for spikes and swing in the market, but they are also a good source of liquidity.

  • Investors

    They always look for the long-term gains and their holding time is longer than the speculators. For their decision making they depend on the research and price cycles. As we know that futures are leveraged and gains can be multiplied if a investors is good in decision making and can find opportunities in futures market.

Pricing In Futures Trading

It is simply the price of a futures contract is the amount of money currently required to buy or sell the future asset ahead of the expiration day.

In Futures Trading the price is determined on the basis of current conditions like current demand and supply and also the market forces. You can say that the current price of a contract is the expected or projected value in the at expiry. The current price may become obsolete and fluctuate radically till the expiry.

presence of the clearing member and standardize contracts need to be understood before getting in. Standardized contracts mean equal quantity of underlying asset of a commodity with the same expiry. So that the price means the same prices for everyone.

Clearing members manage payments between buyers and sellers and nowadays this whole processed is managed digitally. 

Final Words on Futures Trading

Due to the leverage, you can get exposure to the entire contract without investing in the full value of that contract. Clearing members require traders to make good faith deposits in response to ensure the trader has sufficient funds and in event of the fault have the ability to pay and will not default.

Overall this market has a lot of potentials and this is the reason number of investor and speculators are growing day after day.

Start your trading career as a part-time or full-time trader to get the benefit of this market. If you decided to trade only future them it will be good to select a futures trading broker. The liquidity and stability of this market help all the participants to operate more effectively and efficiently.

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