Investment in Futures

Investment in Futures

This term is quite clear. They must save or send an asset, if they buy it. They can complete the contract with a few clicks.

In other words, the futures contract must be completed on the date specified in the contract. Stocks for daily shipping are the most common.

The following are contracts for:

  • gas
  • crude oil
  • fuel
  • gold
  • wheat
  • currency
  • steel
  • cotton
  • wood

Types of futures contracts

There are two types of futures contracts:

  • one that requires the delivery of physical assets
  • one who doesn’t need it.

The first type is used in the real sector of the economy. For example, farmers enter into futures contracts to sell their goods at prices that support them in the future. Buyers need to include a contract to ensure that they will be able to buy goods. Therefore various parties ensure themselves against all possibilities in the market.

The second type of futures contract is usually used by traders who want to profit from price fluctuations, but they do not want to buy the underlying assets themselves. For example, if investors buy oil stocks for $ 48 per barrel and prices rise to $ 56 per barrel, then they increase $ 8. In addition, they can lose the same amount of $ 8 if the price drops $ 40. Traders do not need to save or run an asset, if they buy it. They can complete the contract with just a few clicks.

Where are futures contracts traded?

Futures contracts are traded on the futures exchange. These are the most famous futures and commodity exchanges:

  • The New York Merchantile Exchange (NYMEX)
  • The Chicago Board of Trade (CBOT)
  • Chicago Mercantile Exchange (CME)
  • International Petroleum Exchange (IPE)
  • London International Financial Futures Exchange (LIFFE)
  • London Metals Exchange (LME)

Explanation of futures trading

Trading futures is the same as forex trading. The principles of technical and fundamental analysis can also be applied to futures exchanges: Traders use indicators, charts, and place orders in the same way as in the Forex market. Furthermore, these tools are basically intended for use on the futures exchange, which appear earlier than foreign currencies. However, futures trading has several main characteristics.

  • First, trading on Forex can last forever. In other words, when a trader buys a GBP / USD pair, for example, they can let the transaction last for months or even years. Futures traders trade in Natural Gas, which is why prices can vary depending on the broker. At the same time, futures trading is executed on the futures exchange, so prices are set and that is why all futures brokers have the same quota.

The following is a special symbol that shows the month of delivery:

  • January – F
  • February – G
  • March – H
  • April – J
  • May – K
  • June – M
  • July – N
  • August – Q
  • September – U
  • October – V
  • November – X
  • December – Z

Forex is an off-exchange market where quotations are given by banks and dealers. Therefore prices can be differentiated based on the broker. At the same time, futures trading is executed on the exchange market, therefore the price is set and cannot vary because it has been determined by certain buyers and sellers. Each quote has a value and volume. The website of the exchange gives accurate quotes for previous trading sessions. Therefore all futures exchange brokers have similar quotations.

The volume of futures contracts has been standardized; the exchange determines the quality and quantity of basic assets. For example, pork belly futures (PB) determine the delivery of 40,000 pounds of pork belly meat; Gold futures set delivery of 100 troy ounces of gold with a purity of 995 or higher; Gold futures contracts stipulate the delivery of 1,000 barrels of crude oil. Futures quotas are universal and common for the whole world.

How do you buy a futures contract?

To buy a futures contract, you must register a trading account with a broker, and fill in enough money to make a purchase. This amount is a kind of guarantee against contract depreciation. Depending on which exchange you choose and regardless of basic assets, the amount deposited must reach 2-10% of the assets needed to open the transaction. For example, if an investor wants to buy or sell futures for reference to Brent crude oil, they must have a base margin of $ 4,000, and a maintenance margin of $ 2,000.

Apart from the initial margin, there is also a maintenance margin – the amount needed to keep trading open. For example, if an investor wants to buy or sell a futures exchange for Brent crude oil, they need to have an initial margin of $ 4,000 and a maintenance margin of $ 2,000. After the transaction closes on the expiration date, an electronic system that processes orders calculates profits and losses automatically.

When is the futures expiration date?

The expiration date is the day when the terms of the contract must be worked out. On that day, futures contracts will become invalid.

The expiration date varies depending on the underlying asset.

Therefore, futures contracts for the S & P 500 index will end four times a year: In March, June, September and December. The expiration date is easy to adhere to because it is written on the futures requirements.

When the expiration date is near, many traders and investors close the transaction, and look forward to the new trading cycle. This happens because the exchange becomes manageable, and price dynamics cannot be predicted at expiration. Some traders are of the opinion, that is when the big players enter the market and form trends in the exchange.

How do you use futures to hedge a position?

Investors often use futures contracts to hedge at various positions, because it is an effective method to protect them from price fluctuations. However, even though this hedging method reduces risk, it can also cause a decrease in profits.

There are two types of hedging:

  • hedge purchase
  • a hedge sale.

Hedge purchases, also called long hedges, guarantee traders from the possibility of rising asset prices.

Hedge sales (or hedge short) means the trader sells futures contracts to reduce risk or avoid the possibility of falling commodity prices.

How do you benefit from futures trading?

There is nothing new from taking advantage of futures trading: You have to buy a contract at a low price and sell it at a more expensive price. Then you can buy the contract once again when the price drops, and then sell it again.

This is a well-known method for making profits from trading other tools such as stocks, bonds, currencies, and options.

Futures contracts with the closest expiration date are considered the most profitable. They attract investors, because their liquidity is higher. Such futures prices are close to their original value, and most likely will not experience very drastic changes.

Futures trading seems more complicated at first, but it’s actually easy if you practice a lot and learn all the conditions of the exchange. Trading requires extensive knowledge, so read books, attend training, and visit webinars. Try it and you will be lucky! Good luck!

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