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.

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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.

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A Guide To Trading Futures

In the stock trading industry, many people have garnered a lot of money from futures markets. It is only in this arena where people who have limited capitals can actually make substantial profits even in a short period of time. But because like any other market, this involves a lot of risks and may cost you significant losses, people may often fear to get involved.

Despite its bad reputation however, many experts would claim that futures trading could only be as risky as you want to make it. And if you take on good strategies and give yourself the proper exposure, then this can make you very rich.

What Are Futures?

Futures are standardized and transferable contracts that require a buyer to purchase a stock at a specific sum and within a certain time period in the future. This contract gives the buyer the obligation of purchase, and the seller the obligation to deliver the specific asset traded.

Unlike options, futures contracts obligate the traders to buy and sell instead of just merely giving them the right.

People basically profit from futures by performing speculations in order to provide liquidity and to assume risks for price fluctuations in the market. These valuable functions provide them with substantial returns and potentially large gains. But take note that along with these, substantial risks are involved as well.

How And Why Are Futures Traded?

Trading futures has become quite popular in many markets, especially in day trading. These kinds of trades offer a wide variety of markets and it can be traded at a low cost.

Futures can be traded in both up and down markets. If a particular trader expects the market to go up, a long trade is usually done wherein the trader buys a contract and then sells it. On the contrary, if a trader believes that the market will go down, and then he will most probably make a short trade by entering a trade through selling a contract and then exiting by buying another contract.

With this system, traders are able to profit regardless of what direction the market trends are going. This is the main reason why most traders are only concerned if the market is moving at all, instead of which direction it is actually going.

In futures trading, instead of taking or making deliveries, a trader merely speculates his position in the market’s volatility by predicting directions of trends. If prices move in the right direction, then the trader would be able to profit. If this does not happen, then a trader would experience some losses.

This particular arena in trading can be very promising, but it involves so many risks as well. But if you are well experienced in trading stocks and have adopted quite an understanding in the different trends, behaviors and strategies that the industry has to offer, then chances are, you may probably do well in this particular playing field.

All of this may sound pretty easy at the moment, but if you are planning to engage in futures trading, make sure that you do your research and prepare yourself with the necessary knowledge and skills to successfully execute transactions.

Along with huge profits possible, there are a lot of risks involved and trading futures without the right background can be very detrimental.

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