Futures trading involves buying or selling standardized contracts for assets (commodities, stocks, indices) at a set price on a future date, allowing investors to hedge risk or speculate on price movements. Traded on exchanges, these instruments offer high leverage, enabling control over large positions with a small margin deposit (approx. 10%). It carries significant risk, as losses can exceed the initial margin.
Key Aspects of Futures Trading
Definition: A legally binding agreement to buy or sell an asset at a predetermined price on a specific future date.
Purpose: Primarily used for hedging (protecting against price fluctuations) and speculation (profiting from price changes).
Leverage: Traders only need to deposit a fraction of the total contract value, which amplifies potential gains but also increases the risk of substantial losses.
Settlement: Most contracts are settled in cash or closed out before the expiration date, rather than resulting in physical delivery.
Market Coverage: Includes commodities (oil, gold), financial indices, currencies, and, in some cases, cryptocurrencies.
Benefits and Risks
Benefits: High leverage, flexibility to trade outside traditional market hours, and the ability to profit from falling markets.
Risks: High volatility can lead to rapid, significant losses, especially when holding positions through expiration. It is generally considered unsuitable for beginners without a solid strategy.
How It Works
Margin Deposit: A small percentage of the contract value, often around 10%, is required to initiate a trade.
Mark-to-Market (M2M): Profits or losses are settled daily based on the closing price of the contract.
Expiration: If not closed out earlier, contracts expire, and the holder must take delivery or cash settle.
Disclaimer: Futures trading involves high risks and is not suitable for all investors. Proper knowledge and risk management are crucial.