In 2021, 56% of Americans owned stock. As trading becomes more accessible, more are investing in the stock market.
Yet, stocks are only one type of security you can invest in. There are many other options to choose one. One choice is futures.
But, what is futures trading? Keep reading this short guide on futures trading to find out.
What Is Futures Trading?
Futures trading is buying and selling futures. Futures use derivatives (financial contracts). They derive their value from the price movement of another financial item or asset.
You can buy futures contacts for things like:
- Individual stocks
A futures contract is an agreement between two parties to purchase a derivative at a specific future date for a fixed price. The buyer must buy the asset or security on the agreed date, and the seller must fulfill the order.
During the duration of the futures contract, the fixed price will change, creating a profit or loss.
But with futures, you can take the short or long position depending on how you think the market will change. If you believe the market price will rise, go long. If you believe the market price will fall, go short.
Even if the price of an asset falls, you can still make a profit from taking the short position.
Benefits of Trading Futures
When you buy stock in a company, you pay for all the shares you want upfront. However, when trading futures, you only pay a small fee at purchase. This is the initial margin of the total value of the contract.
This gives buyers much more leverage in futures trading than trading other types of securities.
Further, futures positions don’t have overnight funding charges.
If you leave spot positions open at the end of the day, you will face a fine. But futures contracts don’t require you to make trades all day and settle your bets when the market closes. So, they are great for people who want a more hands-off approach to trading.
Even better, you can use an automated futures trading platform to spend less time trading and help maximize your profits. Let computer models assist you with your trades.
How To Start Trading Futures
Before you jump into trading futures, continue to read about how the contracts work and what affects price changes. The more information you have, the more confident you will feel in the futures contracts you buy.
When you’re ready to start, you need to open an account with a commodity broker. There are many online brokers to choose from that offer great products and low commission rates.
Once the account is open, you need to fund it. Then, you are ready to start buying futures contracts.
Now You Know How Trading Futures Works
When someone asks you, “What is futures trading?” you can answer confidently. But you can also start buying futures contracts and trading with sellers using this information.
If you found this guide about futures trading for beginners practical, you can find similar content in the Finance section. Check it out!