Trading futures is a unique type of investment that involves buying and selling contracts to buy or sell a specific commodity at a set price on a specific date in the future. This article will provide you with everything you need to know about trading, including how it works, the different types of futures contracts and how to begin trading them. If you’re interested in investing in the future prices of various commodities such as oil, gold, corn or soybeans, then you may want to consider futures trading as an alternative asset class. Futures contracts are standardized agreements between two parties for the sale of a set quantity and quality of an underlying asset at a fixed price on a given date in the future. As such, they are generally traded through brokerages and exchanges as secondary market instruments that aren’t necessarily directly from producer to end user or vice versa.
How Does Trading Futures Work?
A futures contract is a binding agreement between two parties – a buyer and a seller – to buy or sell a specified amount of a commodity at a specified price on a specified future date. Contracts are standardized by quality and quantity, with delivery and payment occurring at the time of expiration. Futures contracts are traded on an exchange, with contract buyers and sellers making money based on expected future price movements of the underlying commodity. For example, if a corn futures contract is trading at $3.50 per bushel and you believe the price will rise to $4 per bushel, then you would make money by purchasing the contract. If you’re a corn farmer and you enter into a futures contract to sell $100,000 worth of corn at $3.50 per bushel, you would be obligated to sell your corn in the future even if the price drops.
Pros of Trading Futures
- Liquidity – While options and stocks are traded on exchange, futures markets have an open outcry aspect to them where buyers and sellers can negotiate directly. In this way trading can be done 24 hours a day, 5 days a week. And volumes can be very large as well.
- Standardization – There are standard contracts for all major commodities, with different maturities, so investors know what they are getting into when they invest.
- Leverage – A $10,000 investment might allow you to control $100,000 worth of commodities, so you make more when you’re right and lose less when you’re wrong.
- Risk Management – Futures investors can enter into a contract to sell a commodity that they don’t own as a form of risk management. If a price goes up too much, they can buy the commodity and sell it at a profit.
Trading futuresis a unique investment opportunity that allows you to bet on the future prices of commodities such as oil, gold, soybeans and corn. Before you begin trading futures, you’ll need to open an account at a futures exchange and select the type of futures contract you want to trade. You can also trade futures to diversify your portfolio by investing in different commodities other than stocks and bonds. If you’re new to trading futures, you may want to trade futures contracts with low margin requirements and low risk. Once you’ve decided which instrument to trade, you can go ahead and open an account and begin trading futures contracts.