Understanding Online Futures Trading
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.