Who invests in futures?
Besides Forex, there are still many liquid markets that traders can make invest in. 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 available capital by applying 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 from 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 quite similar financial instruments.
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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 investment capital available. 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.
Because of the high liquidity of the market it is often possible to quickly buy and sell a future. Moreover, it’s also possible to open a short position with a future, which makes it possible to speculate on a decreasing stock price.
Which parties invest in futures?
Futures are useful tools for speculators and hedgers. Hedgers use futures to protect their portfolio. With a future, it is possible to fix a price and buy the underlying instrument at a cheaper price when the rate decreases. As a result, futures can be used to protect a portfolio: in case of a falling price, you can then use a future as an insurance policy.
Institutional investors and companies make extensive use of this opportunity. For example, companies use futures to reduce the uncertainty around commodity prices. With a future, they know in advance at what price they can buy a certain commodity, preventing them from getting into trouble when the price rises.
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.
Trading futures is risky
Traders need to remember that futures are a form of derivatives. The potential return is higher than with stocks, but the risk should not be underestimated. Always set limits when trading futures to prevent your entire deposit from evaporating.
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.