All about futures trading

In plain language, futures trading is a form of paper investment where you speculate on the price of a commodity. If you speculate, you correctly make a profit and vice versa. The merchandise can be anything from currency to corn. It is known as a paper investment since you do not have to have the physical product to earn money. In effect, you speculate on prices based on the product contract.

Who trades futures?

There are two main types of people who trade futures: speculators and hedgers. Hedgers are manufacturers of the product. They trade to protect themselves in case the price of the product changes. For example, a corn farmer would buy many corn futures contracts when he expects the price of the commodity to change.

Speculators are investors with an interest in a certain area. For example, investors interested in the milling industry will buy flour futures. They do not produce the product and often do not have a connection to the products. All they are interested in is making money in case the market moves in their favor.

Futures Trading Benefits

There are many benefits that come with futures trading. Some of these advantages include:

great returns: In case you make the correct speculation, you can win a lot of money. This is because futures are highly leveraged investments. In most cases, the profits you make from your speculation are multiplied by ten. The good thing is that you do not need to have all the money that you are speculating. You need 10% of the amount. This is known as margin and is a form of security bond.

Should the market go against you, you could lose some, all, or even more than the margin you had posted. If the market goes according to your speculation, you make a nice profit and get your margin back.

you take care of the papers: The other advantage of futures is that you work with paper, it is not necessary to have the real product. This means that if you trade corn, you do not need to buy corn and store it at your home or workplace. Unless you are a hedger and in extremely rare cases, you will trade hands with the product.

no inside information: In other forms of trading, such as stock trading, some people have information about companies, so they buy and sell their stocks on insider information. This is unfair to people who don’t have the information, as it is lost. Futures trading does not have this. At the end of a trading session, an official market report is published and can be consulted by all interested parties. This keeps everyone on the same level as no one has more information than the other.

conclusion

This is what you need to know about futures trading. Just like any other form of trading, futures trading has its ups and downs. Sometimes you can lose money and other times make a nice profit. Before you jump into it, take the time to study it.