Derivative, yet lucrative element- futures contracts are agreements between buyers and sellers to buy or sell an asset at a specific price. They are known as derivatives because the contract in itself carries no value; the value depends on the price of the underlying asset. They are a standardized element, with precise quantity and quality. The exchange happens in the form of physical delivery of the asset, or through cash. A majority of futures investors rely more on asset prices than the asset itself. They make profits by speculating on price movements of assets and the particular instrument is of no interest!
How Futures Trading Began?
Commercial industries run on the basis of supply-demand. Agriculture, one of the biggest industries worldwide, follows the same. During times of increasing demand, products are priced higher; similarly, when the market has lesser needs for a product, its price goes down along with the demand. To protect agricultural products from this price drop, futures contracts were established between farmers and buyers. Doing so helped shied farmers from price risks by predetermining the price to sell a crop at, and the seller would acknowledge the buying price prior to the transaction.
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| Futures Trading Guide 2018 |
Futures Transitioning:
What started off as an agricultural benefit has moved into the global trade markets today? Today futures trading cover a wide range of commodities - metals, currencies, food, you name it! These contracts come with an expiration date, beyond which they are deemed invalid. The longer this date is, the more the contract's value. Ironically, contract values are higher, the closer they are to expire.
2 aspects to keep in mind before entering markets:
2 aspects to keep in mind before entering markets:
There are 2 simple, yet crucial things to keep in mind before trading futures.
1) Getting the Right Brokerage: To win at futures trading is no solo adventure; your broker plays as important a role as you do. Several brokerage firms don't offer future contracts. Partner up with a good agency, preferably a discount broker if you are new to the game since they charge lesser fee and commission. There is one too many considerations while choosing a broker! You have to have a good platform to work with, fair commission rates, and an overall experienced broker to guide you through each venture.
2) Types of Markets: Futures trading has found a place in the trading ecosystem, and provides several streams to pursue. There are 6 types of futures contracts - agriculture, energy, currency, equity, metals and interest rates. The best way to start your futures career is by picking a category you have prior experience in. A Forex trader will be more comfortable with currencies, a stock player might find equities better to handle!
Advantages of Futures Trading:
Once you have the right brokerage to guide you, and an asset best suited to your interests, it's happy sailing from thereon! Futures trading contracts are amply advantageous and have a plethora of benefits.
1) Leveraged Environment: Leverage always draws in more crowds, simply because of the increased convenience it provides! With a nominal investment and a small amount for dedicated margin, you can hold positions of high-value effortlessly! The profits obtained from a normal trade are magnified by several times when the same is carried out with leverage. However, this is a risky tool to play with; traders often lose huge sums of money trying to chase profits.
2) High Liquidity: Due to its branching, you can buy/sell any commodity today! Futures trading have an immensely liquid market, with buyers and sellers at every corner. There are several liquid assets for you to choose from and finding potential buyers or sellers is immensely easy!
3) Discounts and Commissions: One of the problems traders face initially is the investments. No one starts off with $1 million. Futures brokers charge very less commission when compared to the other genre of online trading. With just a few dollars, you can participate in most trades, not to mention the freedom to avail leverages and amplify your capital!
Risks Involved In Futures Trading:
As lucrative a field as futures trading is, risks lurk around every corner. One mistake can lead to massive losses!
1) No Control Over The Future: Ironic as it may sound, the fact remains true. Trading futures for crops, for example, may turn awry in an instant if disasters like storms occur and kill all crops! It is difficult relying on supply-demand with such unpredictable factors.
2) Inability to Leverage: Leverage is a weapon only when a trader knows how to use it. Several novice players make huge losses in their ventures due to the inability to use leverages properly. These are meant to boost your trades and profits, but without ample skill and knowledge, they can easily wipe your account out.
3) Expiration: Futures trading is time-bound. A contract on metals may suddenly drop to a lower value before expiration, making the trade completely useless. Due to these criteria, it is difficult relying on expiration dates to guarantee a profitable exchange, since a lower fluctuation can result in scary losses.
Futures, like every other branch of trading, have its definite set of pros, cons and risks. Ultimately, skill is what dominates the world of trades! With steady practice and consistent research, any novice can transition into a professional! Do you want to make this jump too? Call WesternFX today and avail our world-class brokerage. With us by your side, you will achieve Futures trading in Vietnam success in no time.
