Investing in the future can be a great way to make money, but it’s important to know what you’re doing before you get started. Here are the things you should keep in mind before investing in futures:
Table of Contents
What are futures?
Futures are a type of derivatives contract that obligates the buyer to purchase an asset (or sell an asset) at a set price at a future date. Futures contracts are standardized to be traded on exchanges, and traders often use them to speculate on the market’s direction.
How do futures work?
When buying a futures contract, you’re buying the right to buy (or sell) an asset at a future date. The contract price is set when it’s traded, and it typically reflects the price of the underlying asset. If you buy a corn futures contract, you’re buying the right to buy corn at a specific price on a specific date.
What are the benefits of futures?
There are a few critical benefits of futures.
- Futures contracts offer investors a way to hedge their risks. For example, if you’re worried about the price of corn going down, you could buy a corn futures contract to protect yourself against that risk.
- Futures contracts can be used to speculate on the direction of the market. If you think the price of corn will go up, you could buy a corn futures contract with the hope of making a profit.
- Futures contracts are liquid and can be traded on exchanges. It makes them an attractive investment for some traders.
What are the risks of futures?
There are a few critical risks of futures
- Futures contracts can be expensive to trade. It means that you could lose money if you’re not careful
- The price of a futures contract can change dramatically, which can lead to losses or profits for investors
- Futures contracts are risky investments and should only be used by experienced traders
What’s the difference between a call option and a put option?
A call option is an agreement that gives the buyer the right, but not the obligation, to purchase an asset at a set price on or before a specific date. A put option is an agreement that gives the buyer the right, but not the obligation, to sell an asset at a set price on or before a specific date.
What’s the difference between an extended and a short position?
A long position is an investment that benefits from increasing the underlying asset price. A short position is an investment that benefits from a decrease in the underlying asset price.
What’s the difference between trading futures and trading forex?
The main difference between trading futures and trading forex is that you’re buying and selling currencies with forex, while with futures, you’re buying and selling assets such as commodities or stocks. Futures contracts are also standardized to be traded on exchanges, while there’s no central exchange for forex. It makes trading futures riskier but also offers more liquidity.
What’s the difference between buying a futures contract and buying the underlying asset?
The main difference is that when you buy a futures contract, you’re buying the right to buy an asset at a future date. The contract price is set when it’s traded, and it typically reflects the price of the underlying asset. When you buy the underlying asset, you’re purchasing the asset itself.
Can I lose money if I hold a futures contract until expiration?
Yes, you can lose money if you hold a futures contract until expiration. The price of a futures contract can change dramatically, so you could lose money if you’re not careful. It’s important to note that futures trading are risky investments and should only be used by experienced traders.
What happens if I can’t meet a margin call?
If you can’t meet a margin call, your broker may close your position. It means that they will sell the underlying asset if you’re long or buy it if you’re short. You could also be subject if the underlying asset’s price changes dramatically. In this case, you would need to deposit more money into your account to cover the loss.
