Futures are not a new type of financial contract as they have been around since the 1900s, enabling farmers to buy and sell food items like wheat, soybeans, and so on, at a future date. Futures have since grown to include various financial instruments and commodities, making futures one of the biggest markets to speculate on. Let's explore some of the benefits of trading futures and how you can start trading your futures.
What are futures?
Futures are derivative contracts to buy or sell an asset at a later date at a fixed price, with assets including stocks, bonds, ETFs, and cryptocurrencies, among others. These contracts are utilized by investors and speculators. Companies use futures for the supply and delivery of goods or commodities. Unlike companies, investors and speculators use futures contracts to determine if financial security prices will increase or decrease to protect themselves against market risks associated with investments.
Investors can speculate on any commodities and securities in the futures market. The futures market allows participants, including investors, commercial institutions, commodities producers and consumers to buy and sell futures contracts. Futures contracts are available for various assets. For example, investors can speculate and trade ES futures, based on the S&P 500 Index. The index comprises the top 500 large companies in the US stock exchange market. Its stocks serve as a performance indicator for the whole US economy. Their strong performance reflects a thriving economy.
Futures contracts are traded on the Chicago Mercantile Exchange (CME), which is regulated by the Commodity Futures Trading Commission (CFTC). Investors make a profit from a drop in stocks when they engage in short speculation. In the same way, they profit from long future contracts when stock price movement goes up. This strategy gives investors a way to offset exposure to the index against market risks.
A key benefit of futures trading is that it gives investors a quick and efficient means of entering global financial and commodity markets. Investors can easily speculate or hedge against the price movement of financial securities or instruments. This, in turn, protects participants against price fluctuations in the future.
How to start trading futures
Trading futures is easy to get started by following these steps:
Understand futures trading
Understanding how futures work is crucial before you start trading. You need to know if you will be trading stocks or commodities, and the risks associated with each. Whether you choose stocks or commodities, you need an investment strategy. There are two common strategies in futures trading, namely trading with long or short positions. In the long strategy, you only make a profit when futures trade prices increase while you make a profit using the short strategy when prices decrease. Another strategy is spread, which involves buying varieties of future contracts and making a profit when the price difference expands or contracts.
Select a trading platform
The next step is to choose a trading platform to facilitate trades. Carrying out research is crucial before you select any trading platform. There are certain factors to look for when choosing a platform, seek platforms that are; user-friendly to use, have API for algorithmic trading capabilities, have a mobile trading app, and have different order types for risk management.
Futures trading is now easier with the use of virtual accounts. Some platforms allow beginners to start trading with paper accounts. As a new investor, trading with a virtual account helps you master trading and safeguard against market risks before you start trading with real dollars.
