Futures trading is a form of profit on the stock exchange. Futures is a contract to buy or sell an asset on a specific date at a specified price. The subject of trade can be stocks, bonds, currency, “rates” for weather, inflation and other economic/social/ natural indicators. Checkout click here for more info.
Features futures trading
Trading on the exchange provides traders with a guarantee of compliance with the futures standard rules. In particular, the possibility of early termination of the agreement with the cancellation of obligations between both parties to the contract. The standard form of the document is used that complies with legal norms (only the price of assets changes). All work is carried out according to the rules of the exchange.
In trade, several standard terms are used, such as the volume of the underlying asset, the size of the tick, the minimum price of change, the margin, the term for fulfilling obligations, the time to trade a contract, the limits of price fluctuations. The efficiency of futures trading depends on the degree of ownership of these concepts, therefore, before investing large amounts it is worth experimenting on small volumes.
Benefits of Futures Trading
In contrast to the Forex market, futures trading involves a whole number of assets (without splitting into parts).
The most attractive features of futures are:
-The possibility of an instant transaction
-Free quantity increase.
-Simple settlement system.
-Admission to the exchange of companies and individuals who do not possess exchange assets.
Trade is carried out according to a standard contract, there can be no “surprises”, as well as uncoordinated changes in the terms of cooperation. There is an insurance fund on the exchange, confirmed by the guarantees of the Clearing Chamber of obligations. A trader chooses leverage at his own discretion, his size significantly exceeds the maximum for working directly with the underlying asset, but heightened risks should be taken into account when choosing large leverage – quick enrichment can easily turn into an instant loss of the entire deposit.
Any contract has a final date of performance. Such a time limit allows for the planning of trade and obtaining a predictable result. A trader gets access to tools from all over the world, which allows diversifying risks. The reality of the transaction is supported by the pledge provided, which is stored on the balance sheet of the “third party”.
Futures apply different trading strategies. One of the options was mentioned as an example of a futures contract. This approach is called risk hedging. By opening a transaction aimed at compensating price risks, the trader provides protection against unpredictable price jumps on the traded assets.
The hedging mechanism involves a balance of obligations and a game in opposite directions in order to achieve a minimum level of risk. The trader must take into account that this tool can also reduce the profitability of trading. The hedge will depend on the correctly chosen time of closing the contract.
The closer the time of delivery of the futures, the lower the need for insurance transactions, which affects the need to close the hedge shortly before this date. The later this is done, the lower the profit will be. After the hedge is closed, there is the possibility of re-acquisition / implementation of a futures contract aimed at hedging.