The stock market is not that easy. There are a lot of terms that are unclear for beginners. Especially, the term of futures contracts. Here we are to describe to you how the stock market and world economics works. So, today we will talk with you about the futures – what is this, where is it used and so then. Let’s start.
futures contract, or futures is a standardized contract on buying or selling something on the current prices, regardless or the price changes. For example, if a farmer wants to buy seeds, but he is not sure whether he will have enough money to buy it in winter, he can buy a futures contract on seeds on summer prices in summer, and then buy it in winter for the summer prices, regardless of the current prices on the market.
Futures trading is very popular in the stock exchanges now. Especially one of the popular trading instruments – indices – is devoted to the futures trading.
Types of futures
- Deliverable futures. Futures which obligate one of the participants to deliver goods to another participant and obligates this one to pay for it. If the seller doesn’t have goods on the expiration date, he has to pay fine for it.
- Settlement futures. Futures which doesn’t contain any obligations of delivering something. They are useful just for speculations or for hedging risks.
Main purposes for futures trading
There are three main purposes of the futures trading:
- Hedging risks. You can use futures to prevent the price changing on the assets you need, because futures can guarantee you fixed prices in the future.
- Speculations. You earn money from the difference between futures price and market price. You sell your futures when the price of the asset grows and earn money.
- Arbitrage. Futures arbitrage is a kind of trading strategy for futures. In this strategy, the trader makes deals in different times or at the same time on different stock exchanges and makes money on the price difference.
Difference between futures and CFDs
- Some people can mix futures and CFDs. There are several differences between these instruments not to mix them:
- Futures are traded in the stock exchange, CFDs are out-the-counter instruments.
- Futures have expiration dates, CFDs don’t have.
- Goods can really be delivered on the futures. CFDs can be used only for speculation.
- Futures trading is strictly standardized and regulated. CFD trading rules can depend on the brokerage company.
- CFDs are usually cheaper than futures because of less amount. For example, standard oil futures is 1000 barrels, but standard oil SFD is 100 barrels. So you need less money to start SFD trading.
Difference between futures and options
Futures sometimes can be mixed with options, but it’s important not to mix them. The main differences between them are the following.
Futures obligate both sides of the deal – seller and buyer: seller must sell goods on the ordered date and on ordered price, buyer must buy them. Options obligate only seller: seller must sell the goods on the ordered date and on the ordered price, but the buyer has an option whether he or she agrees to buy goods on this price, or not. But in the option, the seller gets a premium for the deal, regardless of the fact whether the buyer will buy the goods or not – that’s why to be a seller in an option is profitable too.
Options are usually popular among traders because of this feature. If you have opened futures position, you have to pay for your purchase, but with option you have only a possibility to buy. That’s why with options you can open more positions with the same amount of money.
Assets for futures trading
Futures trading includes several types of financial instruments. You can trade futures on the following assets:
- Stock indices, like Standard & Poor 500.
- Goods & commodities, like crude oil, natural gas, seed etc.
- Precious metals, like silver, gold, and palladium.
- Bonds, including U.S. Treasury bonds.
Can I trade futures online?
Of course. Here we have collected top online brokers and financial marketplaces for trading futures online.
- Interactive Brokers (interactivebrokers.com)
- TradeStation (tradestation.com)
- E-Trade (us.etrade.com)
- Asset Capital Business inc (ACB) (acb-group.com)
- CMC Markets (cmcmarkets.com)
- Saxo Bank (home.saxo)
- TD Ameritrade (tdameritrade.com)
How to trade futures online?
Follow these steps to start your futures trading.
1. Choose your platform for futures trading (some of them are listed above).
2. Understand the mechanism of the futures trading. We have described above what are the futures. So now we can describe to you the trading basics. There are two types of futures contracts – “longs” and “shorts”. You open “long” position if you think, that the price will grow: you buy the futures on the today’s price lately and sell it at a higher price in advance. You open a “short” position if you think the price will fall: you sell the futures contract in advance on a current price, but later buy at a lower price, and the difference between these two prices is your income.
3. Choose your trading strategy. To do it, you can use a demo account to learn how to trade or use copy trading. If you haven’t chosen copy-trading, then it’s important to learn the selected market and financial instrument (for example, gold). How and why does the price of this instrument changes? Which profit can you make on it? Train on your demo account, and after a few months of training, you can start risking your own money.
4. Start trading. Open your first positions and earn your first dollars. Don’t forget about margin trading, which maximizes your profit.
Futures trading is very popular now, but beginner traders sometimes mix futures with another instrument, like options and CFDs. We have mentioned how to differ them, where can you start futures trading online and how to do it. We hope you will enjoy futures trading and make a lot of profit from it.