Besides Forex, there are still a lot of liquid markets that traders can make money from. One of these markets is the futures market. Futures are being traded on every exchange, both by hedgers and by speculators. This is because of the liquidity and the amount of options futures offer. The futures market is an interesting possibility for traders who want to increase their capital with leverage.
What is a future?
A future is a contract between two parties where the transaction is executed at a certain date. At that time one party can then buy or sell the underlying property of the other party. With a future both parties have a duty to execute the transaction, while with an option that right only belongs to the buyer of the option. Besides that slight difference, options and futures are the same.
What are the benefits of a future?
A future has several benefits. Thanks to leverage it’s possible to take a sizable position, even if you only have a small budget. This is possible because only a small part of the value of a future needs to be paid. The amount varies between 5 and 20 percent of the total value.
Thanks to the liquid market, you can sell purchased futures very easily. Moreover, it’s also possible to go long and short with a future. This means you can make money whether the market goes up or down.
Who trades futures?
Futures are very nifty instruments for speculators and hedgers. Hedgers use futures to build certainty. The price of the underlying property is fixed so the risk is reduced. Hedgers can cover all their positions because a future can be connected to several financial products.
Speculators, on the other hand, use futures to make money from their vision on the future. Depending on the time between buying and selling of the futures, a speculator is classified as one of three types of speculators: swing traders, day traders and position traders.
Cost of a future
The big advantage of futures is that the costs are connected to signing the contract. Unlike stock and bonds, where the fee is usually 0.15 to 0.20 percent of the value, the fees of futures are even lower. Trading futures is possible starting at 2.80 pounds.
Trading futures is risky
Traders need to remember that futures are a form of derivatives. The potential return is higher than with stock, but the risk should not be underestimated. Always set limits when trading futures to prevent your entire stake from evaporating.