Futures are essentially contracts to buy or sell something at a certain price in the future. They are used for both spot and long-term investments and can be an attractive alternative for those looking for higher returns. They are also perfect for those who want to hedge their bets or take a position on the next big market trend.
History Of Futures
Futures can be traced back as far as 17th century England, where they were first used to hedge against fluctuations in the price of grain. At the time, there was no formalized trading environment, so people would often make projections about the future price of grain based on their expert knowledge about current trends and what they believed would happen in the future. This type of informal trading evolved into more structured environments such as futures exchanges, where contracts could be traded and monitored for performance.
Types Of Futures
There are several different types of futures, each with unique features that make them suitable for a particular purpose.
- Commodities: Futures contracts for many different commodities such as gold, silver, platinum, and palladium as well as many other industrial metals and raw materials.
- Currency Futures: Futures contracts for currencies such as the Japanese yen, Euro, and the Swiss franc. Currency futures are popular with global traders because of their ease of use and simple contracts that can be executed at any time.
- Sterling Futures: These are basically like currency futures, but the British pound is the underlying instrument rather than the foreign currency. They are often used to hedge against fluctuation in the value of the pound.
- Vacancy Future: Vacancy futures are used when investors want to bet on whether or not a specific property will be leased. When the property is leased, the holder of the contract makes a profit; when it isn’t leased, the contract expires and the investor loses their investment.
- Interest Rate Futures: Interest rate futures are used by investors who want to make a bet on the future rate of interest. They are based on a principle called ‘compounding’, which means that the profit from a well-executed trade continues to grow as the investment grows.
- Credit Futures: Credit futures are used by capital markets professionals to protect themselves against fluctuations in the credit rating of a company or government. In case you’re wondering, credit default swaps work essentially the same way as credit futures except that they are based on credit ratings rather than on the assumption the company will pay back their debt.
Advantages Of Using Futures
There are several advantages to using futures rather than conventional investments such as stocks or bonds. First of all, commodity and currency futures are easy to use because all you need is an account at a futures exchange. You don’t have to set up multiple accounts or register with several stockbrokers. To begin placing orders, you just need to find the right partner at a reputable futures brokerage. The second advantage of using futures is that they are equipped for higher-volume, more-liquid transactions. That should make any trader, professional or otherwise, very excited. Finally, futures allow for more creative strategies because you can play the market in so many different ways. You can use trendlines, support and resistance levels, and a variety of other technical tools to execute smart, profitable trades.
Disadvantages Of Using Futures
It’s important to keep in mind that all investments carry some level of risk, and that’s true even of futures. Like any other investment, you could lose money because of bad luck, bad judgment, or plain old fashioned lack of knowledge. That’s why it’s always a good idea to do your research before putting money into anything, especially something as complex as futures. Since commodities, currencies, and other types of investments can fluctuate in value, you can also get seriously hurt by a sharp decline in the value of your chosen instrument. For instance, if you’re purchasing a gold contract and the price drops, you could lose all your money because you’re obliged to buy back the specified amount at the end of the contract. This is called ‘locking in a trade’ and means you’re going to ‘ride the wave’ of the market rather than fight it using a stop loss.
How To Trade Futures
Once you’ve determined that you’d like to enter the world of futures, all you need is a brokerage account. It doesn’t hurt to sign up for an account with a reputable futures brokerage, and you’ll have access to all the different types of futures as well as the tools to trade them. As a first step, you’ll need to select a broker who’s willing to work with you to create a solid platform for successful futures trading. The next step is to study up on the different types of futures available and what makes them tick. Fortunately, this process is made easy because all you need is an account at a futures brokerage and a little time on your hands. You don’t need to run around looking for volumes of specific commodities or invest in a specific industry. In case you’re wondering, you can read a more detailed report on any given commodity or currency at sites such as COTBullion and CFTC (Commodity and Futures Trading Commission), respectively. Once you’re familiar with the fundamentals of each type of future, you can easily choose between them and determine which one is best suited for your personal situation.