Trading in futures are a great medium for hedging and managing risk. Futures are derivative contracts that derive value from a financial asset such as traditional stock, bond, commodity or currency and thus can be used to gain exposure in various financial instruments including stocks, indexes, currencies and commodities.
To deal in a futures contract a trader has to only invest a small fraction of the value of the contract called ‘margin’. For e.g., an investor can trade a US$100,000 worth of commodity, by paying US$2,000 as margin in futures trading i.e. just 2%.
Futures markets are very liquid and most markets are open throughout the day, providing traders with easy ins and outs. There are a sizeable number of future contracts being always traded. Thus orders are placed faster as there are buyers and sellers readily available at any given point of time. Also it is rare that prices will vary dramatically, particularly for contracts with an expiry date of the next few weeks or months.
Futures markets move much faster than traditional investments like equities or bonds and an investor trades in a commodity secured with margin due to which the earning potential is much higher. On the flipside, any imprudent move can just as easily also lead to greater losses. However, losses can be pared with stop-loss orders.
Speculating with futures contracts is basically a paper investment and you don’t have to worry about storing the physical commodity. The term contract is used as there is an expiration date bound to the contract. The exchange of the commodity within the contract takes place in the uncommon scenario of the delivery of the contract.
The commissions on Futures instruments is much lower as compared to investments and the trader is liable to pay that only after he ends or liquidates his position.
Futures markets are comparatively fairer as compared to stock markets as it is quite difficult to get any confidential information. Besides official market reports get released as soon as a trading session ends so any trader can analyze them before trading resumes again the next day.
Futures contracts give investors the ability to garner profits from the price margin of an instrument prior to its expiry date. Futures are much-preferred nowadays as trading instruments for traders looking for flexibility and diversification of their portfolio. The futures market is a highly liquid one with large volumes of transactions executed each day. Opening and ending positions can therefore be done quickly with swift execution sans any delays and help you to maximize your profits.
Important terms in Futures trading: