As a standardized-forward contract, a Futures contract is a legal agreement signed between two parties i.e. a seller and a buyer to sell or buy a specific financial asset on a specified future price and date. Every Future contract is a representation of a specific amount of a given commodity or security, such as shares, index, gold or similar. Here, the future date refers to the date of final settlement. Similarly, the price of a contract at the end of trading session is known as the settlement price for that day of trade on the floor of exchange. Unlike stocks or bonds, these contracts, however, cannot be referred as ‘direct’ securities.
Trading Futures contracts needs you to contact a brokerage house that will open your trading account with their platform. At this point, you are strongly suggested to properly go through the risk disclosure document as to trading in Futures contract so you are well aware of both the risks and gains. After the account opening procedure is completed, you will have two ways to start trading Futures. One of those is to trade with a direct access to the Futures markets through a secure account and second is to route trade orders by the means of your brokerage house.
Gains and Risks Associated with Trading Futures Contracts
Like other trading choices, investing in Futures contracts has its own gains and risks. Let’s first look at how a Future contract can be beneficial for you.
- Liquidity – The market sees a huge amount of Futures contracts being traded on a regular basis which eventually increases the likelihood of the market orders being made quickly. Therefore, it is not common for the contract prices to move down to a new level, making a Futures contract a genuine liquid asset for traders.
- Low Cost – In order to get a Futures contract, you need to only put up a small fraction of the total value of the contract as margin. Since the margin needed to own a contract is usually small, you can earn huge profit if your predication about the market moves turns out to be correct.
- Hedging – In Futures trading, hedgers refer to those producers of commodity, such as a farmer or owner of a mining company, who use Futures exchange to manage the price risk of their underlying assets or business. These hedgers have the opportunity to trade by selling a futures contract first to earn the price difference as profit and leave the trade to purchase it at a later stage.
Futures contract trading comes with a range of risks including fluctuating interest rate, liquidity risk, settlement date and delivery risk as well as leverage risk. Generally, this type of trading is inherently risky and needs you to not only be familiar with all the risks but also have the skills to manage those risks. Nature wise, Futures contract work in the similar way as Options contracts and are equally useful at the time of speculation or hedge. If you are interested in learning more about Futures contract trading, GigaFXhas easy-to-understand content introducing everything from the basics to complex trading strategies for trading Futures contract. Also, the site has a user-friendly interface and a range of trading tools so you feel as much comfortable as possible when trading Futures contract from this platform. Read this GigaFX review to learn more.