#Technology

A beginner’s guide to futures

beginner’s guide to futures

Futures are derivative contracts that obligate traders to swap an asset by a specific date for a fixed sum for a beginner’s guide. Essentially, it is trading the future price of a given asset. Traders can usually access futures contracts through a brokerage firm, such as Saxo Singapore. Keep reading below to learn more about this financial instrument.

Understanding futures

Futures allow traders to lock in the price of the underlying commodity or asset. These contracts have an expiration date and set prices that are already decided by both buyer and seller. Futures are usually identified by their expiration month. For example, a December gold futures contract expires in the month of December. Although traders and investors use the term futures to refer to the overall asset class, there are many types of futures contracts that traders can use. You can also visit Business Walk for more information.

While futures and options are similar, it is important to remember their differences. Unlike options, which expire later and then can become worthless, a futures contract obligates the buyer to receive the underlying asset and the seller to provide the underlying asset and deliver it.

Uses for futures

Futures typically have two types of uses in investing – hedging and speculation.

Hedging: Here, futures contracts are usually bought and sold by traders, companies, or institutional investors who have the intention to receive or deliver the underlying commodity. This is done often as a way to help manage the future price risk that the commodity can potentially have on their investment portfolios or operations.

Speculating: Futures contracts are considered liquid investments and can be bought and sold by traders up to their expiration date. As such, this is a very important feature for many speculative traders and investors as they do not own the underlying asset and most often do not wish to be a beginner’s guide. They can therefore trade futures online in order to express an opinion about said underlying asset. In addition to potentially profiting from the direction, a particular commodity is heading to. Then, before the futures contract expires. They can either buy or sell an offsetting position that will eliminate any obligation the traders have to the underlying commodity.

Types of futures

Futures on currencies: These provide you exposure to the value of a fiat or digital currency.

Energy futures: Traders can use futures to gain exposure to the price of common energy products used by governments and private companies. As well as individuals for consumption purposes.

Metal futures: These futures can offer exposure to the price of certain metals. Most companies rely on these metals as materials for construction and manufacturing (such as gold, silver, copper, and platinum).

Grain futures: Traders can gain exposure to the price of raw grain materials often used for commercial processing and animal feed.

Livestock futures: These futures expose the price of live animals used in the supply, processing, and distribution of meat products.

Financial futures: Index contracts and interest rate contracts are two types of financial futures. Index contracts expose specific market index values. Interest rate contracts provide exposure to the interest rate of a specific debt instrument.

Why trade futures

Futures contracts are also used by certain investors as a hedge against potential market fluctuations for a specific commodity that might have a significant negative impact on their company or portfolio to be a beginner’s guide. Below are a few reasons why someone may choose to trade futures.

Avoid charges for overnight funding

A great thing about trading futures is that futures positions have no overnight funding charges. On the other hand, charges sadly apply to most spot cash positions. If they are left open at the end of a usual trading day. As such, this means that people who want to futures trade are generally looking to take a longer-term position on a particular underlying asset. This way, they will be able to avoid multiple overnight funding fees. That said, traders should keep in mind that futures do have a wider spread when compared to most spot cash positions.

Access liquidity

The number of trades that are being handled each day means that futures markets are considered particularly liquid for traders.

Use leverage to trade

Futures contracts are leveraged. That means they allow traders to receive an increased market exposure for only a small deposit that is a fraction of the full value of the trade, known as a margin. Their trading provider will then provide loans that make up the full value of the trade. So, when trading with leverage, traders must remember that any potential profit or loss will still be determined by the position’s total size, not the actual margin used to open the position. As such, leverage can help to amplify profits. It can also magnify losses, which could potentially overlay the initial capital overlay.

Diversification

Futures provide traders with a few ways to diversify their investments in ways most stocks cannot for beginner’s guide. They can provide investors with direct market access to a variety of underlying commodities and assets, in addition to secondary market goods like stocks. Additionally, futures allow traders to access specific assets that are not usually found in other financial markets. These instruments may also be used if traders are looking for some risk management strategies in the case of potential upcoming events and could move the markets sometime in the future.

Hedge positions

Hedging with futures allows traders to control their risk exposure in an underlying market. For example, if a trader owns shares in a particular company and is worried about the company’s shares dropping sometime in the future be a beginner’s guide. They could instead short it using an index future. This way, the profits made could potentially offset a portion of the losses to the share position.

On the other hand, if a trader had current short positions, they could instead go long on an index future. This way, they could potentially take advantage of it when the market rises in the future. On the whole, the idea behind this strategy is that long profits would likely offset any short losses.

Tax benefits

Compared to other short-term trading markets, futures can provide traders with some potential tax benefits. That is because profitable futures trades are often taxed on a 60/40 basis. This means 60% of profits that traders gain are taxed as long-term capital gains. The other 40% is instead taxed as ordinary income. When compared to stock trading, for instance, profits on stocks that are held less than a year are instead taxed 100% as ordinary income.

Leave a comment

Your email address will not be published. Required fields are marked *