The Basics of Futures Trading
Futures trading involves buying or OnlineFuturesContracts selling a contract that promises to cover an underlying asset at a set price on a future date. The underlying asset could be anything from a stock index to a grain, oil or currency pair.
What Is a Future?
A futures contract is a financial instrument that enables parties to lock in prices or exchange rates for a future transaction. Originally used to mitigate the risk of price or exchange rate movements, futures are now traded for an array of different assets and products.
What Are the Benefits of Futures Trading?
Unlike trading stocks, which is a more common investment strategy for small investors, futures are primarily traded by institutions and industry insiders. They’re also not a popular choice for casual traders, because they typically involve large dollar amounts and require physical delivery of a product or security.
The Importance of Liquidity in Futures Trading
Traders who buy futures contracts are speculators, and they take the price risk themselves in an attempt to profit from favorable price movement. They can be made up of full-time professional traders, small individual traders, portfolio managers and hedge funds.
In the futures market, brokers allow traders to use leveraged accounts in order to amplify returns with relatively little of their own cash outlay. However, this is a double-edged sword: on the one hand, it can help you make larger profits in smaller moves, but on the other hand, it can also amplify your losses in large swings.