Futures trading is a strategy that allows investors to hedge or speculate about what an asset will be worth at a specific time in the future. Because futures trading is leveraged, there is tremendous opportunity for large rewards. That also means futures trading carries a large risk for loss. Before starting to trade futures, it’s imperative that you have a comprehensive understanding of the risks involved. The best way to do that is to take a futures trading course.
What Is Futures Trading?
If you think a stock is undervalued, buy it. If you think it’s overvalued, short it. But what do you do if you think you know what the broader markets are going to do six months down the road? That’s where a futures trading course comes in.
When you buy a stock, you are purchasing an asset at a set price in the hopes that it will go up in price. Futures trading allows you to invest in commodities through a futures contract.
Futures are traded on futures exchanges around the world. In the United States, two of the main futures exchanges are the CME Group and the Commodities Exchange Center in New York.
A futures contract is an agreement to buy or sell an asset, usually a physical commodity, but also a stock index or financial instrument (like a bond) at a date in the future. While a stock represents a publicly traded company, commodities are raw, unprocessed materials of the global economy.
Commodities fall under four main headings: Energy (crude oil, heating oil, natural gas, coal, and gasoline), Metals (gold, silver, copper, platinum, palladium, and nickel), Livestock and Meat (lean hogs, pork bellies, live cattle, and feeder cattle), and Agriculture (including corn, wheat, milk, rice, cocoa, coffee, cotton, sugar, and frozen concentrated orange juice).
Because futures are traded in commodities that are in a raw, unprocessed state, you cannot engage in futures trading in flour. In addition to the main four commodities, you can also trade futures on stock indices and bonds.
How Futures Trading Works
To make money, traders speculate on the future price movement of the underlying commodity. If you are bullish, you would take a long futures position. If you are bearish, you would take a short position.
Unlike stocks, which you can hold forever, a futures contract has a set expiration date. After that date, the contract ceases to exist. Market direction and timing are of paramount importance with futures trading.
The worth of a futures contract itself has no inherent value. The price fluctuation comes from a secondary source. On top of typical supply/demand issues, a futures contract can fluctuate on economic data, geopolitical tensions, election results, and even the weather.
When trading futures, you secure a selling or buying price, the quantity, quality, and date of delivery. Longer-dated futures contracts are usually more expensive than shorter-dated contracts. Once you agree on the specifics, you are locked in.
When you buy a futures contract, you are obligated to purchase or sell the contract at the set price. This is the case regardless of whether the price of the underlying commodity has gone up or down while you are within the futures contract expiration timeframe.
Many investors like futures trading because it provides them with leverage. When buying or selling a futures contract, an investor does not need to pay for the entire contract. Sometimes, an investor only needs to put up 10% of the value to take a position. This way, you can take a larger position than if you purchased the underlying commodity outright.
While getting more for less opens the door for huge gains, it also has the reverse effect. If your contract goes in the opposite direction, there is a huge chance you could lose significantly more than your initial investment.
Learn-To-Trade.com: Toronto’s Leading Provider of Stock Market Training
As the leading and oldest provider of stock market training courses in Canada, Learn-To-Trade.com Inc. is led by licensed, industry professionals. Our extensive stock market and futures trading courses provide our members with the knowledge required to create a disciplinary approach to the financial markets and trade confidently in today’s complex and fast-paced stock world. On top of that, we provide a professional and supportive trading environment where members can interact with other traders and staff.