In layman’s language, futures trading is a form of paper investment where you speculate the price of a commodity. If you speculate, correctly you make a profit and vice versa. The commodity can be anything from currency to corn. It’s known as a paper investment as you don’t have to hold the physical product for you to make money. In fact, you speculate the prices based on the contract of the product.
Who trades in futures?
There are two main types of people that trade in futures: speculators and hedgers. The hedgers are manufacturers of the product. They trade to protect themselves in the event the price of the product changes. For example, a corn farmer would buy plenty of corn futures contracts when he expects the price of the product to shift.
Speculators are investors with interest in a given area. For example, investors interested in the milling industry, will buy flour futures. They don’t produce the product and often don’t have a connection with the products. All they are interested in is making money in the event the market moves to their advantage.
Benefits of futures trading
There are plenty of benefits that come with futures trading. Some of these advantages include:
Huge returns: In the event, you make the right speculation, you stand to make a lot of money. This is because futures are highly leveraged investments. In most cases, the profits you gain from your speculation are multiplied tenfold. The cool thing is that you don’t need to have all the money that you are speculating. You need 10% of the amount. This is known as margin, and it’s a form of security bond.
In the event the market goes against you, you can lose some, all, or even more than the margin that you had placed. If the market goes according to your speculation, you make a tidy profit and get back your margin.
You deal with papers: The other advantage of futures is that you work with papers-you don’t have to hold the actual product. This means that if you are trading with corn, you don’t need to buy corn and store it in your home or place of work. Unless you are a hedger and in extremely rare cases, you will exchange hands with the product.
No inside information: In other forms of trading such as stocks trading, some people have information about companies thus buy and sell their shares with inside information. This is unfair for people without the information as it results to loses. Futures trading doesn’t have this. At the end of a trading session, an official market report is released, and everyone interested can look at it. This keeps everyone at the same level as no one has more information than the other.
This is what you need to know about futures trading. Just like any other form of trading, futures trading has its ups and downs. Sometimes you can lose money, and other times make a tidy profit. Before you jump into it, take the time to study it.