Today, it’s common to come across the term futures trading – whether on social media, news outlets or among investors. But what is futures trading? It’s a concept that has gained immense popularity in the investment world. Futures trading refers to the process of buying or selling an asset (commodity, stocks, or currencies) with an agreement to deliver it on a future specified date at a predetermined price. In this blog, we’ll break down what futures trading is, how it works, and its advantages and disadvantages, among other things.
Futures Trading Mechanism
Futures trading is facilitated through Futures contracts – an agreement between two parties to buy or sell forms of assets at a predetermined price and date. One party speculates that the price of the asset will increase, while the other predicts that it will decrease. A contract consists of standard underlying asset, trading unit, and delivery date; however, there is no money exchange at the beginning. At the end of the contract, the buyer will purchase at the prearranged price, irrespective of the asset’s real value.
Futures Trading Advantages
Futures trading is a highly leveraged trading instrument, meaning that traders can control huge positions using small amounts of capital. This allows futures traders with a limited budget to enter multi-million-dollar trading positions without much capital. Additionally, futures trading offers high liquidity, and traders can easily buy and sell contracts anytime during trading hours. Furthermore, futures trading also allows risk management – you can sell your assets even before they are bought, ensuring that you don’t risk capital on volatile markets.
Futures Trading Disadvantages
However, futures trading comes with some risks which every trader must take note of. Due to the highly leveraged nature of futures, they are extremely risky and speculative, meaning that they can lead to substantial capital losses if not well-managed. Also, futures traders need to have an in-depth knowledge of the trading market, technical and fundamental analysis tools and trading strategies so that they can make informed decisions. This means that newbies might find it challenging to get started in futures trading.
Future trading requires discipline
To achieve success in futures trading, traders need to exercise the utmost discipline in executing their trades. Following their trading plan is vital and failure to do so will result in erratic trading, leading to poor performance. Also, futures traders are speculating on an asset that has yet to be produced or purchased, and this requires them to keep up to date with global news, price trends, and other economic indicators that could impact their trades.
Future trading is not for everyone
Without substantial capital, the futures market may not be the best option for investors. Trading futures involves substantial risks, and you must be confident that you can manage your positions well while factoring in the inherent price volatility. Futures trading requires mental and financial discipline and an in-depth understanding of the market.
Futures trading is a complex investment instrument and not for the faint-hearted. Success in futures trading requires discipline, knowledge, and a willingness to take on high risks. Yet, when executed correctly, futures trading offers great liquidity, good returns and helps to manage risk effectively. The futures market has an important role to play in today’s economy, and traders should learn more about it before committing capital to future contracts.