The futures market can be used by many kinds of financial players, including investors and speculators as well as companies that actually want to take physical delivery of the commodity or supply it, and includes a wide range of assets. Oil, for example, is a commodity that can be traded in futures contracts. To decide whether futures deserve a spot in your investment portfolio , consider the following:.
Futures contracts allow players to secure a specific price and protect against the possibility of wild price swings up or down ahead. To illustrate how futures work, consider jet fuel:. An airline company wanting to lock in jet fuel prices to avoid an unexpected increase could buy a futures contract agreeing to buy a set amount of jet fuel for delivery in the future at a specified price. A fuel distributor may sell a futures contract to ensure it has a steady market for fuel and to protect against an unexpected decline in prices.
In this example, both parties are hedgers, real companies that need to trade the underlying commodity because it's the basis of their business. They use the futures market to manage their exposure to the risk of price changes.
But not everyone in the futures market wants to exchange a product in the future. These people are futures investors or speculators, who seek to make money off of price changes in the contract itself. If the price of jet fuel rises, the futures contract itself becomes more valuable, and the owner of that contract could sell it for more in the futures market. These types of traders can buy and sell the futures contract, with no intention of taking delivery of the underlying commodity; they're just in the market to wager on price movements.
With speculators, investors, hedgers and others buying and selling daily, there is a lively and relatively liquid market for these contracts. Commodities represent a big part of the futures-trading world, but it's not all about hogs, corn and soybeans. Stock futures investing lets you trade futures of individual companies and shares of ETFs.
Futures contracts also exist for bonds and even bitcoin. Some traders like trading futures because they can take a substantial position the amount invested while putting up a relatively small amount of cash. That gives them greater potential for leverage than just owning the securities directly. Most investors think about buying an asset anticipating that its price will go up in the future.
If corn prices go up. For protection against higher corn prices, the processor can "hedge" his risk exposure by buying enough corn futures contracts to cover the amount of corn he expects to buy. Since cash and futures prices do tend to move in a parallel direction, the futures position will profit if corn prices rise enough to offset cash corn losses.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts.
Floor brokers handle trades for their personal clients or brokerage firms. Firstly, the value of futures depends on that of another derivative, so it has no inherent value in itself. The contract lasts only for a particular time period and has an expiration date, unlike other financial instruments. When you buy a stock, it represents equity in a company and can be held for a long time, whereas futures contracts have a fixed time period.
This is why the market direction and timing are vital while considering futures trading. Diversification: Access a wide array of investments including oil and energy, gold and other metals, interest rates, indexes, grains, livestock, and more.
After Hours Market: Futures markets trade at many different times of the day. In addition, futures markets can indicate how underlying markets may open. For example, stock index futures will likely tell traders whether the stock market may open up or down. Liquidity: The futures market is very active with a large amount of trading, especially in the high volume contracts. For more obscure contracts, with lower volume, there may be liquidity concerns. Hedging: If you have an existing position in a commodity or stock, you can use a future contract to protect unrealized profit or minimize a loss.
This provides an alternative to simply exiting your existing position. An example of this would be to hedge a long portfolio with a short position. The standard account can either be an individual or joint account. You will also need to apply for, and be approved for, margin privileges in your account.
This feature-packed trading platform lets you monitor the futures markets, plan your strategy, and implement it in one convenient, easy-to-use, and integrated place. One of the unique features of thinkorswim is custom futures pairing.
Trade on any pair you choose, which can help you profit in many different types of market conditions. Assuming the trader has no interest in actually owning the gold, the contract will be sold before the delivery date or rolled over to a new futures contract. As the price of gold rises or falls, the amount of gain or loss is credited or debited to the investor's account at the end of each trading day.
If the price of gold in the market falls below the contract price the buyer agreed to, the futures buyer is still obligated to pay the seller the higher contract price on the delivery date. Actively scan device characteristics for identification.
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Part Of. Stock Market Basics. How Stock Investing Works. Investing vs. Managing a Portfolio. Stock Research. Table of Contents Expand. Key Differences. Examples of Options and Futures. Key Takeaways Options and futures are similar trading products that provide investors with the chance to make money and hedge current investments.
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