Johnson AlexInvestments are essential, be it in property or in stocks or anything else. If you’re someone who has experience in investing and wants to expand their investment portfolio to increase their chances of earning, then you might have come across futures trading. Futures trading involve buying and selling contracts of an asset that is supposed to arrive in the future to earn profits. However, if you’re new to this type of investment, then it might be a little confusing or complicated to understand its nuances. In this article, we’ll give you a comprehensive review of futures trading review.
Definition of Future Trading –
Futures trading involves buying and selling of standardized contracts that allow for purchasing or selling of an underlying asset on a certain date in the future, with a fixed price. The underlying asset is anything that has market demand and supply – from metals, agricultural goods to energy products. These standardized contracts make the futures trading a regulated entity, forcing the buyer to purchase at that price, even if market prices go either up or down. Futures trading reduces the buyer’s risk of price fluctuations, either in the short term or long term.
How Futures Trading Works –
The first step for futures trading is to speculate the future price or market demand of an underlying asset. Then, the buyer or seller of the futures contract establishes a position by purchasing or selling a futures contract. There are two parties involved in this contract – the buyer and the seller. The buyer is hoping for the future price of the underlying asset to increase, while the seller is hoping for the opposite. The futures contract specifies the amount of the underlying asset being traded and settled on a specific date. To build a position, the buyer can take leverages through borrowing money, by making a small down payment in return for a larger market exposure.
Types of Futures Contracts –
Futures trading is versatile and depends on the needs of the investors. Futures contracts can be categorized based on the underlying asset they are based on, such as interest rates, currencies, and agricultural products. Apart from this, Futures contracts can be either physically settled or cash-settled. In a physical settlement, the deliverable commodity is supplied to the buyer on the maturity date, whereas a cash settlement occurs when the buyer pays the difference between the contract price and the market price in cash.
Risks Associated with Futures Trading –
Futures trading is lucrative, but it comes with its own set of risks. Futures trading is highly leveraged, meaning that a small change in the underlying asset price can cause significant losses. Furthermore, the term of futures trading is fixed, and the buyer has no control over the contract’s maturity. The underlying asset’s delivery requires the seller to sell it at the contracting price, regardless of the market price. Hence, the seller bears the credit risk of the buyer.
Future Trading: Pros and Cons –
Futures Trading is excellent for seasoned investors, who know the market and are not risk-averse. It allows for a quick and easy way to speculate the market and earn returns from price fluctuations. Additionally, futures trading is regulated, meaning that all parties involved are governed by strict laws and can avoid manipulation. However, futures trading comes with the risk of high leverages, illiquidity, volatile markets, and credit risks concerning the counterparties involved.
Conclusion:
Futures trading, like any other investment, has its risks and benefits. It would be best if you considered several factors before taking a position in futures trading. The above information provides detailed insights into futures trading and its functioning. Furthermore, the most critical factor to remember is that futures trading is not a get rich quick scheme, and one should approach it with caution. In conclusion, it’s always better to do thorough research and take a calculated risk when it comes to futures trading.
