As the financial markets continue to evolve steadily, investors are able to trade a growing range of products and derivatives. This creates greater diversity in the market, and stimulates a wider interest among corporate firms and independent traders. Despite this expanding wealth of options and instruments, however, investment methods such as forex and futures trading remain extremely popular and continue to dominate the vast financial market place. These techniques have existed for generations, and provide a familiar option for established financial traders.
A Guide to Futures Trading: It’s Nature and Advantages
In its most simplistic form, futures trading is a type of investment that involves speculating on the price of a specific commodity. Aside from this, however, what other underlying factors determine its nature and the advantages that it delivers to financial traders? Consider the following: –
How do Futures Traders Invest Their Capital?
The term commodity is widely used in financial market circles, but the key thing to remember is that it relates to a tangible financial instrument rather than a derivative. Essentially, commodities represent physical products that are used in everyday life, with examples such as corn, lumber, steel and wheat among the most popular in terms of trading. With a specific commodity or portfolio of products in mind, traders use their knowledge and experience to speculate on price and determine whether or not the value will rise or fall.
What is a Futures Contract?
While the term ‘futures contract’ may seem a little complex and disconcerting, it’s true meaning is actually fairly straightforward. The name is applied primarily because it represents a contract which has an expiration date, which is determined according to each individual commodity and the participating parties involved. You will determine whether or not the price of a commodity is likely to rise or fall within an agreed period of time, and establish a contract with a time frame that reflects this. Contracts can be cancelled at any time, while as a trader you also have the option of opening numerous short positions by using this investment method.
What are the Advantages of Futures Trading?
There are numerous advantages of futures trading, each of which go some way to explaining why the practice is so popular. Not only are futures agreements highly leveraged investments that initially demand only a small fraction of the contract’s value, but the margin required is not a down payment or form of security bond. This helps to minimise the risk facing traders, especially in terms of offsetting potential losses. Trading futures also allows you to invest freely without taking on board the burden of physically owning a commodity. As a paper investment, futures trading means that practitioners do not need to find space for mountains of corn, steel or wheat.
The Last Word for Investors
While it is easy to see why futures trading remains popular, like any other form of investment it carries the potential for risk. Remember that all margin based investment opportunities can incur significant losses, while the contracts that you undertake do not provide any form of tangible wealth or security. It is important to bear these facts in mind, especially if you intend to operate profitably for a considerable period of time.