Trading Futures, Online Futures Trading, Futures Trade

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Futures trading is a form of investment involving speculation of the price of a commodity in the future. Futures arederivatives bought or sold on a futures exchange. They are contracts to buy or sell a particular amount of a commodity at a predetermined price on a specified date in the future. Trading futures is not for newcomers to investing, since it involves high risk.

The majority of futures trading is speculative and involves cash settlements (also known as paper investing), rather than for the actual physical delivery of the commodity. Online futures trading is not as popular as online stock trading, since the former is substantially more risky.

Till the 1980s, futures trading comprised of only a handful of farm products. The popularity of the futures market subsequently rose and in the 21st century it involves a huge variety of commodities, including:

  • metals – like gold, silver and platinum.

  • livestock – such as pork bellies and cattle.

  • energy – like crude oil and natural gas.

  • foodstuffs – such as coffee and orange juice.

  • industrial products – like lumber and cotton.

  • currencies.

  • indices – such as the Dow Jones, Nasdaq and S&P 500.

    • Trading Futures: What does it Involve?

    There are two aspects that distinguish futures trading from trading in stocks or bonds.

    • A futures contract has a specified lot size. So, there could be a futures contract of 100 shares of IBM or 50 shares of Cisco Systems. You could also opt for an index. For instance, one could opt for purchasing the E-mini S&P 500 futures contract. This gives you exposure to all the stocks in this index.

    • You can trade with margin payment. This means that when you purchase a futures contract, you do not have to pay the entire amount of the contract. You only need to pay a specified margin amount. For instance, you could purchase a futures contract for 100 shares of IBM worth $102 per share at a 20% margin. This means that instead of paying $10,200 (100 x $102), you need to pay only $2040 (20% of $10,200). This offers substantial leverage to the investor.

    Benefits of Trading Futures

    Among the benefits of trading futures are:

    • High leverage

    • High liquidity

    • Low brokerage fees

    Dangers of Trading Futures

    The main risk involved in trading futures is that it is a highly speculative market.

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