Futures and commodities trading: how the modern market is improving

Trading in the financial futures markets is multifaceted and diverse. The derivatives market is an important and extremely popular component of the financial stock market. Millions of investors and traders appreciated the uniqueness of derivatives – first of all, efficiency at relatively low costs. Derivatives market instruments are used by speculators in short-term commodities trading and investors to insure (hedge) risks in operations with stocks, bonds, in arbitrage operations, as well as to create trading strategies based on combinations of futures trading and options invest in commodities. At the global level, futures and commodities trading volumes in the derivatives market far exceed the volumes of transactions in the underlying asset futures markets.

The most liquid futures contracts are

  • futures index S & P500;
  • crude oil contract;
  • contracts for treasury bonds;
  • gold futures trading;
  • among the currency futures contract, the most popular are contracts for the euro, Japanese yen, mini-contracts for major world currencies;
  • futures for corn and wheat are traditionally leading among the commodity futures group.

Advantages of Futures Trading

The definition of “futures” comes from the English word “future”, which means “future” in translation. This is the main essence of the derivative instrument, which provides the opportunity to conclude the delivery futures contract in weeks or even months.

An agreement with the indicated rates is signed now but is executed at the end of the designated period. If the quotation goes up, then the buy or sell takes the goods at a relatively low price and earns on the difference in costs. In the case of depreciation, the seller wins, because he sells the product at the past, higher price tag.

For speculators and small investors

Futures and commodities trading futures contracts are cheaper than similar stock market transactions. They have lower exchange fees and are not accompanied by additional costs, such as depository services.

The derivatives market crude oil provides an opportunity to use the leverage from 1: 5 to 1:10, which is beneficial for participants who do not have too much deposit.

For institutional investors

Institutional investors are the main participants in the derivatives market. For this category, there is no task of making a profit in a short-term transaction; they use futures trading to hedge (insure) positions from adverse price movements in the underlying asset market.

By opening opposite positions on futures and commodities trading futures contract and underlying assets – buy or sell stocks futures or vice versa, hedgers are insured against possible unwanted fall or increase in the prices of shares, bonds, and foreign exchange positions.

Derivatives provide an opportunity to ensure even those positions for which futures are not issued.

Portfolio users invest in commodities futures trading to effectively manage their portfolio of securities.

Highly skilled market participants create strategies based on a combination of commodity futures and options.

Commodity futures have several differences from standard assets

  • Urgency – each document describes specific deadlines for the execution of the futures contracts, which cannot be violated by any party.
  • When trading securities, a businessman does not have a physical commodity future in his hands.
  • Tight control by the state and the exchange. Since commodities trading in these instruments does not have a real base, they are unstable and unreliable. In this regard, the market should be constantly monitored by higher authorities. This avoids fraud and reduces risks.

A derivative instrument differs in many respects from standard ones; however, it is also traded on the world stock exchange crude oil and brings earnings to the invest in commodities. The player’s profit is directly commodity futures dependent on futures contract quotes. If the dealer correctly predicts the direction of the price, he can get a good profit from the transaction.

Futures Contract Characteristics

Parameters of futures contracts are standardized by the exchange and specified in the specification.

The minimum price step is also specified in the specification of the instrument – the minimum possible change in the quotation. For example, for crude oil futures, this value is $ 1000. The cost of the basis point, the guaranteed rate for long and short positions are also determined.

Futures contracts provide for the delivery of the indicated amount of the underlying asset at the end of the futures contract, the day after the expiration date. In most cases, the exchange takes over the delivery. This type of crude oil futures is called deliverable.

Settlement futures contracts are widely used in modern commodities trading; for them, the delivery of goods is not expected; all futures for stock indices are settlement.

Recommendation and conclusions

So you got acquainted with what futures are. And if you want to start trading them, but don’t know where to start, try starting with our free videos. It will be more convenient for you to get access to training materials after registering on the Dowmarkets company website. With Dowmarkets, you don’t have to worry about privacy policy and brokerage accounts.

Posted: 2.07.2020 | Dawid Siłowacki
Something went wrong
Message: