Futures

Futures are a type of financial contract that has obligations to a buyer or a seller to buy or sell an asset, which may be commodities such as bonds or currencies or other financial instruments i.e. stock indices at an agreed date for an agreed price, as specified in the futures contract. The Futures contract specifies the underlying details including quantity of the asset, and are standardized to enable trading on an exchange. The exchange is basically a clearinghouse or rather a continuous auction house that provides clearing and settlement services. The futures contract will also include whether this is a cash or physical delivery of the asset which must be carried out on the agreed settlement date on the futures contract.

It is possible to exit the contractual obligations of a futures contract, this would be carried out by offsetting the futures contract position either by buying back in the case of a short position or selling a long position.

Futures contracts offer the ability for market participants to insure against the risk of fluctuations in market prices, this is referred to as hedging. At the same time as participants are hedging there are those that are speculating, those speculating are hoping to make a profit from the fluctuations in the markets. This continuous ebb and flow of activity on exchange-traded futures contracts keeps the market liquid and competitive.

It’s worth taking some time to research futures fully before first dipping your toe in the water of the futures markets, or preferably if you are new to futures trading the assistance of a full service broker. The broker will obviously charge for their services but you will have someone who can assist with all the possible pitfalls of futures trading and give you much needed advice and information to stop you making too many mistakes and getting a bloody nose. If you decide to go down the self service route then caution is needed and beware of allowing your emotions to get the better of you. You should look to start very small possibly trading on a single market to allow yourself to become au fait with the complexities of futures trading, ensuring that you have adequate capital to trade is also essential, and if you are wise you should ensure that you have a minimum of £4,000 to £5,000 in your trading account. Don’t be disillusioned by losses whilst you are learning, you can’t after all make omelettes without breaking eggs. It is for this reason that you must ensure that you can afford those losses before you embark on futures trading.