What is “Futures Trading”? – Beginners’ Guide

May 19, 2016

What is Futures Trading?

The main difference between a Futures Trade and other trading on the stock market is the fact that you do not actually own anything tangible in Futures.

With the Stock market, you own a small piece of the company or share, which you are buying, selling or holding on to.

With Futures trading, you are basically looking at speculation trading on the future direction of the Commodity price and whether it will go higher or lower.

It is effectively like placing a bet on whether the commodity price will move up or down or even remain the same in the future. Buying or selling in futures is predictions for future buying and selling.

The investor also plays an important role in this scenario.

A futures investor strives to make good predictions and therefore trading decisions based on what he or she believes will happen with the prices. The investor in futures is looking to foresee future market changes.

When an investor notices how prices are fluctuating, he or she can take advantage of this by either buying or selling at a profit.

The Futures Contract

Unlike a stock, which represents equity in a company and can be held for a long time, if not indefinitely, futures contracts have finite lives.

They are primarily used for hedging commodity pricefluctuation risks or for taking advantage of price movements, rather than for the buying or selling of the actual cash commodity.

The word “contract” is used because a futures contract requires delivery of the commodity in a stated month in the future unless the contract is liquidated before it expires.

Why Future Prices Change

Stock indexes are affected by whatever influences the stock market as a whole.

Interest rates certainly also play a major role and higher interest rates usually have a negative effect on the stock market.

Other influences include the overall prospects for corporate earnings and corporate tax policies that help or hurt big businesses.

Making Money with Futures Trading

There is a considerable amount of risk involved.

However, many people overlook this risk because the profit margins are huge when trading is done correctly. Traders have been known to make a few million dollars even starting with only a few thousand.

It is not easy to make a good profit, but nowadays there are not really any methods where you can really profit without some level of difficulty to overcome.

5 Different types of Futures Trade Commodities

1. Agricultural – This is one of the largest futures markets, usually in Soybean, corn and wheat areas.

2. Interest Rate Futures – A growing market that focuses on financial transactions on BONDS and on interest rates themselves.

3. Currency Trading – Perhaps the largest of all Futures markets, FOREX FUTURES TRADING.

4. Energy Futures – Oil and Gas and other fuel trades.

5. Food Futures – Food markets include Orange juice, Sugar and Coffee, as well as many other fuel sources.

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