Futures are contracts between two parties, where one party agrees to sell a commodity later while the other party agrees to buy the same commodity at the agreed price at a later date. Futures contracts can be on standardized assets such as stock index, bonds, and gold and are traded on futures exchange platforms. Commodities such as gold and oil can be delivered physically, while some, such as stock index, are only convertible into cash equivalents.
Futures participants are categorized into producers, commercial buyers, and speculators. Each of these players has a different time zone, different strategies, and objectives for holding an asset. A combination of these participants makes up a futures market. Futures markets are designed to create an environment with equal opportunities for all players. Here is a comprehensive guide on futures contracts and their benefits over other forms of investment.
How are Futures Contracts Traded?
How to trade futures? Futures traders can capitalize on their global assets in four ways, including self-directed trading, managed futures, broker-assisted trading, and algorithmic and automated systems.
Self-Directed Trading
Self-directed futures are the most common due to their nature. As the name suggests, these contracts allow owners to make their decisions and execute their trades. However, futures traders are responsible for the consequences of their actions, including incurring profit or loss. Most self-directed futures trades happen online, so traders can use an online trading platform to transmit their orders. Alternatively, they can trade directly through an FCM or a futures exchange that allows transmission of orders to their preferred exchange platform.
Broker Assisted Trading
It is the ideal option for a trader seeking to build a long-term and personalized relationship with a futures broker. Broker assisted trading platforms can help a trader monitor futures markets and research before initiating a trade. Futures traders trading on broker-assisted platforms can work with licensed investment advisors who can advise them based on their technical and macro factors analysis. Broker-assisted platforms can help clients determine the market to trade on and strategies to employ to reach their goal.
Managed Futures
It is a trading technique where an appointed money manager makes all decisions, including rebalancing the portfolio and allocating assets. These professional money managers are known as commodity trading advisors, and their area of specialty is the global futures markets. CTAs diversify across markets to maximize returns from bond futures, treasury futures, and currency price fluctuations.
Why You Should Trade Futures
People trade futures to take advantage of market opportunities presented by local and macro events. Traders can take advantage of futures markets that correlate with what they specialize with. Futures trading can also be done in a capital-efficient manner, given that traders don’t have to invest their entire capital in futures contracts. All a trader needs to get started with futures trading is a fraction of the entire contract. Futures markets present speculators with very high leverage, so it is up to them to decide their trade amount.
Benefits of Futures Contract
One of the main advantages of indulging in futures trading is the ability to go short. Futures markets present traders with plenty of opportunities to make a profit from price fluctuations. Therefore, a futures trader can gain from both the rise and fall of the market price. Going long refers to when a trader buys a futures contract to resell it after the price increase. On the other hand, going short is when a trader sells an asset hoping that the price will decline in the future and buy it. Futures contracts can also be used as a diversification tool due to their varied correlations to the markets.
