How to trade in futures market?

The futures market offers the opportunistic investor the option of using small amounts of their own money to control large amounts of products, including gold, currencies, and agricultural commodities.

Gold Ira Accounts

A futures contract is a legally binding contract to deliver, if you are selling, or to take delivery, if you are buying, of a specific commodity, index, bond, or currency at a predetermined date or price. A futures contract can include everything from a standard size amount of wheat, oil, or a country’s currency. The amount and date of delivery of the contract are specified, though in almost all cases delivery is not taken as contracts are bought and sold for speculative or hedging purposes.

Futures are utilized by both those who use the actual commodity and by investors. For example, in May a farmer plants some corn, but doesn’t know what corn will be selling for in November. He can sell a futures contract for November and “lock in” the future selling price today. On the other hand investors can buy a futures contract if they believe the price of a security is going to appreciate, or they can sell a futures contract if they believe the price of a security is going to decline.

Futures are often thought of in the same category as options. While they are both derivatives, in that they derive their value from some base security, there is one very important difference. While options give the right, but not the obligation to buy or sell the underlying security, a futures contract is a legally binding obligation to buy or sell that same commodity. Thus, while options limit your loss to the price paid for that option, futures trading could lead to a loss of your entire investment and more to meet that obligation.

Another difference between the futures and the equities markets involves the use of word margin. Although the contract sizes for currencies are large (often the equivalent of over $100,000 for a single contract), an investor does not have to buy or sell a full contract. Rather, a margin deposit on the contract is maintained, which is actually a “good faith” amount of money to ensure your obligations to the full amount of the futures contract. Minimum margin requirements vary by broker, but are typically only a fraction of the contract’s total value, and are not related to the actual price of the contract involved.

Futures trades must be made through futures brokers, who operate both full-service and discount operations, and may be related to the stock brokerage that you already deal with. However, popular discount stockbrokers do not handle futures contracts.

Technorati Tags: , , , , , , , , ,

Trading Options And Futures – Comparing The Two Types Of Contracts

In trading, it is quite common for the terms options and futures to be used interchangeably. Although these two contracts have a lot of similarities when it comes to principles, they are actually two very different things and therefore interchanging them when conducting trades in the market can be a very lethal mistake for anyone.

Let us learn the differences between these two contracts in order to prevent making the wrong decisions in buying and selling rights for stocks or commodities. Through this, we may just be able to prevent risks and maximize chances for profit.

What Is An Options Contract?

An option is basically the right to buy or sell a specific amount of stock, currency, or whatever commodity offered in the market. This contract basically allows an individual to enjoy, but to necessarily become obligated, to exercise these rights. This contract can only be valid for a specific period of time, and commodities traded can only be bought and sold at a certain fixed price.

What Is A Futures Contract?

On the other hand, a future is a transferable contract that requires the delivery of a certain stock, currency or whatever commodity traded. Like an option, the delivery of the trade is done through a fixed price stated in the contract and within a time frame, so one should not go beyond the expiry date.

However, it is very important to take note that a holder is obligated to exercise the conditions of the contract unlike in options where the holder can have the liberty of deciding.

The Differences Between Options And Futures

Aside from the fundamental difference between the two contracts on rights and obligations, there are also other differences that include commissions, the size of underlying stocks or commodities traded and how gains are realized.

In a futures contract, an investor has the liberty to sign into the contract without paying upfront. However, an investor cannot take hold of an options position without paying a premium to the contract holder. The option premium therefore serves as payment for the privilege to not become obligated to purchase the underlying commodities in cases wherein there are unfavorable shifts in prices.

Another major difference between options and futures is also the size of the underlying positions that can be traded. Usually, futures contracts would include much larger sizes for the underlying positions as compared to that included in options contracts. Because of this, the obligations included in futures make it riskier for a contract holder to trade due to the possibility of losing so much.

Lastly, the two contracts differ with how gains are received by parties involved. For options contracts, gains can be attained in three methods. Either the holder exercises the option, purchases an opposite option, or waits until the expiration date arrives to be able to collect the difference between the price for asset and the strike price, so he or she could get profits. However, profits for futures contracts can only be realized by either taking an opposition position or through the instant change in the value of positions at the end of each trading day.

Knowing about the differences between an options contract and a futures contract can help broaden your knowledge in stock trading, and this can surely prevent you from making the wrong decisions if ever you decide in joining this particular arena.

Remember to never trade without doing your research and fully understanding what contracts you are dealing with. If you just take the extra step to acquaint yourself, then you just might be able to spare losing so much money.

Technorati Tags: , , , , , , , , ,