If you’re new to the world of futures trading, it can be a daunting task trying to figure out where to start. There are so many different products and exchanges to choose from, not to mention all the technical jargon that gets thrown around. In this article, we’ll give you a crash course in futures trading so that you can start trading with confidence.
What is a Future?
A future is a contractual agreement to buy or sell a particular asset at a predetermined price at some point in the future. Futures contracts are standardized so that they can be traded on an exchange. The most common type of asset traded on futures exchanges are commodities such as agricultural products, precious metals, and energy products.
Futures contracts are unique in that they allow traders to speculate on the future price of an asset without actually owning the underlying asset. This is possible because when you enter into a futures contract you are only required to put up a small percentage of the total value of the contract as margin. This is sometimes referred to as leverage, and it allows traders to control large positions with relatively little capital.
How do Futures Contracts Work?
Futures contracts are traded on exchanges such as the Toronto Futures Exchange (TFX) and Montreal Futures Exchange (MFE). Each contract has its own ticker symbol and is quoted in terms of Canadian dollars per unit of the underlying commodity.
When you buy a futures contract, you are effectively buying an obligation to purchase the underlying asset at some point in the future at a predetermined price. For example, let’s say that you buy one December crude oil futures contract when crude is trading at $50 per barrel. This means that come December, you will be obligated to purchase 1,000 barrels of crude oil at $50 per barrel regardless of what the actual market price is at that time. Of course, you could always choose to sell your contract before it expires if you think crude oil prices are going to fall.
The key thing to remember about futures contracts is that they always have an expiration date. This is because prices can change quite dramatically over time, and so it wouldn’t make sense to have a contract that didn’t expire. The expiration date for each contract is different depending on the commodity being traded. For example, crude oil contracts expire monthly while gold contracts expire every two months.
Why Trade Futures?
Futures offer traders a unique way to speculate on changes in price for a wide variety of assets without actually owning the underlying asset. This leverage can magnify both profits and losses, which is why futures trading is considered high risk but also high reward. In addition, because futures contracts always have an expiration date, traders are forced to constantly reevaluate their positions and make sure they still make sense given current market conditions.
Futures trading offers traders a high-risk/high-reward way to speculate on changes in asset prices without actually owning the underlying asset. Futures contracts always have an expiration date which forces traders to constantly monitor their positions and make sure they still make sense given current market conditions.