Online futures trading is an option available for people who want to invest their money into commodities, such as oil, silver, soy bean oil, etc. As a rule, it is more difficult to open a futures account than it would be to open a Forex account. You get scrutinized more about your financial background and net worth when opening an account and you need to show that you have experience.
Online futures trading involves trading commodities that have a delivery date on a particular time in the future. Futures tickers differ from stocks. Each futures market has a specific ticker symbol that is followed by symbols for the contract month and the year. For example, crude oil futures has a ticker symbol – CL. The complete ticker symbol for March 2017 Crude Oil Futures could be CLH7, but this may vary from broker to broker.
There are certain advantages and disadvantages associated with futures trading. It is important that the new investor know how this type of trading works before even trying to risk a certain amount of capital. One of these is the amount of fluctuation. E.g. 10 cent if change in crude oil price results in $100 change in your futures trading account balance, a contract being in the $3,500 range.
In futures trading you buy or sell futures contracts. A futures contract is an agreement on a future delivery of a certain amount of product, called a contract, at a certain price. The futures contract evolved when grain farmers began setting up agreements with buyers for future harvests.
A farmer may offer in the market about 8000 bushels of wheat that can be delivered on a certain month of next year. There would be buyers who may want to maintain their wheat supply for next year and would want to buy such futures contracts to make sure. Upon an agreement on the price for the future produce, the farmer and the buyer have gone into making a futures contract.
The futures contract is well suited for both parties. The farmer would know I advance just how much he would be paid for the harvest next year while the buyer would know the costs of future supply of wheat now. What the farmer and the buyer will do is make a written contract that would sometimes involve a certain amount of cash as a guarantee of the contract.
The futures contract that the two parties agreed to would not merely be stored in someplace safe. The contract may even change hands during the course of time before the actual date of delivery. Depending on the circumstances, farmers and buyers may even trade these contracts to other interested parties. There are times that the buyer of the futures contract may have a change of mind and would not want to take the future delivery of the produce. He would then find some other buyer who would be interested and offer the futures contract at a certain price. There are also times that the farmer would decide not to deliver on the said contract and would then pass on the obligation to deliver to another interested farmer. The transfer and trade of these contracts became known as futures trading.
Many people have discovered that trading the contracts became a good way to make money. Soon, there were people who began to buy and sell the futures contract without intending to take the delivery for themselves. All they wanted was to profit from the price changes that the futures contracts go through. These people are called speculators who try to profit by buying the futures contracts low and selling them high.
Futures trading is different from the trading that happens on the stock market. First of all, the U.S. stock market is open 9:30 am-4 pm EST. On the futures markets you can trade from the opening of the Asian session at 6 pm EST to 5 pm the next day, when New York closes, 5 days a week.
The following table lists the largest futures exchanges in the world and the commodities that are traded at each.
|Chicago Board of Trade (CBOT)||Chicago, USA||Grains, Energy|
|Chicago Mercantile Exchange (CME)||Chicago, USA||Livestock|
|New York Mercantile Exchange (NYMEX)||New York, USA||Softs, Base Metals, Energy, Precious Metals|
|London Metal Exchange (LME)||London, UK||Base Metals|
|NYSE Euronext (Euronext)||Paris, France||Grains, Softs|
|Tokyo Commodity Exchange (TOCOM)||Tokyo, Japan||Softs, Base Metals, Energy, Precious Metals|
|Tokyo Grain Exchange (TGE)||Tokyo, Japan||Grains, Softs|
Here are some of the most popular futures markets that are being traded these days.
1. Currency trading.
This is widely known as the FOREX that stands for the foreign exchange. Some of the well-known currencies that are being traded include the Euro, the Swiss Frank, the Australian Dollar, the British Pound, the Japanese Yen and the US Dollar.
There are many crops and produce that this department can sell. ICE (Intercontinental Exchange) is the center of global trading in soft commodities. Now known as ICE Futures U.S., the exchange offers futures and options on futures on soft commodities including coffee, cocoa, sugar, cotton and frozen concentrated orange juice. Sugar No. 11 is the benchmark contract for the global sugar market which is one of the world’s ten largest agricultural futures markets. ICE Futures Europe lists London softs markets including cocoa, coffee and white sugar.
3. Energy Futures.
This includes gas and the oil futures. The market for this one has got to do with anything that fuels and lights up people’s lives.
4. Interest Rate.
This not only includes interest rates but also bonds and other kinds of financial transactions. Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures.
The most common materials being traded for this sector include the kinds of metals like silver and gold.
Participants in a futures contract are required to post margins in order to open and maintain a futures position. Margins are financial guarantees required of both buyers and sellers of futures contracts.
Before a futures position can be opened, there must be enough available balance in the futures trader’s margin account to meet the initial margin requirement. This money is held by the exchange clearinghouse as long as the futures position remains open.
The maintenance margin is the minimum amount a futures trader is required to maintain in his margin account in order to hold a futures position. The maintenance margin level is usually slightly below the initial margin.
If the balance in the futures trader’s margin account falls below the maintenance margin level, he or she will receive a margin call to top up his margin account so as to meet the initial margin requirement.
Futures are a way to profit from securities’ short-term price movements and trends, both up and down, without actually owning the underlying asset. It is a type of investment where investors try to take advantage of trading futures contracts. The commodities that such futures contracts trade can include grains such as wheat, corn to other produce such as lumber, livestock, cattle, coffee and even orange juice. There are also futures contracts for precious metals such as gold, silver and platinum.
What makes futures trading quite attractive is the high level of investment leverage that it offers. Investors can invest just as little as ten percent of a futures contract’s value in order to have the opportunity to trade it. This allows investors to trade futures contracts using lesser investment capital for trading larger valued contracts.
Futures contracts usually have standardized amounts of the commodity that they involve. For example, if an investor holds a future contract for wheat, he usually holds a value worth 5,000 bushels. Trading the contract would be dealing based on the value of the 5,000 bushels of wheat.
Although futures contracts only require a fairly small investment (usually ten percent of the contract value, known as the margin), investors should still think before taking or buying a futures contract. Traders should consider if they have enough margins to cover the contract as well as if they have what it takes to trade and deal a sizable move in prices that can go against their position.
It is also important that beginner traders try to establish a system of risk and reward when trading for a particular commodity. There are many factors that may affect the position of the trader in different futures contracts since they can involve a variety of commodities. A good way to do this is to establish a stop loss feature on traded futures. This simply means that the investors establish a certain price range wherein the contracts may stop trading in order to preserve profits from the trade or to minimize the possible losses.
Each commodity contract requires a different minimum deposit, depending on the broker, and the value of your account will increase or decrease with the value of the contract. If the value of the contract goes down, you will be subject to a margin call and will be required to place more money into your account to keep the position open. Due to the huge amounts of leverage, small price movements can mean huge returns or losses, and a futures account can be wiped out or doubled in a matter of minutes.