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What Is Futures Trading And How Do I Get Started

What are futures?

Futures are derivative contracts that allow you to buy or sell an asset at an agreed-upon price at a future date.

You can invest in soybeans, coffee, oil, stocks, exchange-traded funds, cryptocurrencies, or a variety of other assets. A futures contract can be used by a wide range of financial players, including investors and speculators, as well as companies seeking physical delivery or supplies of commodities. As an example, investors can trade oil futures contracts, as well as stock futures contracts — an example of stock futures investing.

What is a futures market?

Futures markets are exchanges where investors can buy and sell futures contracts. In a typical futures contract, one party agrees to buy a specific quantity and take delivery on a specific date.

Commodity futures and options must be traded through an Crypto Trading Platform by people and firms registered with the Commodity Futures Trading Crypto Commission. Most futures market participants are consumers or commercial or institutional producers.

Consider these factors when deciding whether futures deserve a place in your investment portfolio.

How do futures work?

In the case of jet fuel, futures contracts allow players to protect themselves from wild price swings (up or down). To illustrate how futures contracts work, let’s look at how they work:

Futures contracts allow an airline company to lock in jet fuel prices at a specific price in the future to avoid an unexpected increase in fuel prices.

In order to ensure a steady market for fuel and protect against unexpected price declines, fuel distributors may sell futures contracts.

At a price of $3 per gallon, both sides agree to buy (or sell) 1 million gallons of fuel in 90 days.

This example shows two hedgers, real companies whose business relies on trading the underlying commodity. They use the futures market to manage their exposure to price fluctuations.

Futures investors or speculators, on the other hand, do not always want to exchange a product in the future. They aim to profit from price changes in the contract itself. Increasing the price of jet fuel will increase the value of the futures contract, and the owner of that contract will be able to sell it on the futures market for a higher price. It is possible for these types of traders to buy and sell futures contracts without intending to take delivery of the underlying commodity; they are simply on price movements.

The market for these contracts is lively and relatively liquid with speculators, investors, hedgers, and others buying and selling every day.

Stock futures investing

It’s not just about hogs, corn and soybeans that make up the futures-trading world. Stock futures investing lets you trade futures of individual companies, ETFs, bonds, and even bitcoin. Futures contracts are also available for bonds and bitcoin. Investing in futures allows traders to hold a substantial position (the amount invested) with a relatively small amount of cash. As a result, they have a greater leverage than those who own the securities directly.

In short-selling, investors borrow money in the hope that an asset’s price will fall, and they buy at a lower price later. Most investors anticipate that an asset’s price will increase in the future, but short-selling lets them do the opposite.

Stock futures are one of the most common applications for futures. In order to hedge exposure to stocks, someone can buy a futures contract on the Standard & Poor’s 500 index. The short will earn them money if stocks fall, balancing out their exposure to the index. Alternatively, the same investor may feel confident in the future and purchase a long contract, gaining a lot of upside if the stock market rises.

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