How to Use Leverage in Futures trading
One of the major differences between futures trading and other types of financial trading is the use of leverage. With futures, a buyer and seller agree to buy and sell an underlying commodity at a specified price at a certain date. This means that the price of the contract changes compared to the price when the trade was initiated, creating profits for both sides. It’s not as simple as it sounds, though. The following are some important points to keep in mind when trading futures.
Canada futures trading involves using collateral. The buyer of a contract can use this collateral to hedge against a drop in its value. The “loss” party must maintain the brokerage margin requirements. If the value of the collateral falls below the agreed-upon price, the investor can wire cash to shore up their account. But this method of trading requires an initial margin amount, which can be quite small. It’s important to note that margin account requirements are different depending on which market you’re trading.
The price of a futures contract is based on supply and demand of the underlying asset in the future. However, this price is fixed only if there is a plentiful supply of the underlying asset. If the asset isn’t available yet, however, the price is not fixed. It’s possible to make a profit by trading futures at a discount to its theoretical value. This is called arbitrage. However, you can’t use this strategy for a futures contract without an underlying asset.
In addition to the NFA, the CFTC also regulates the trading of commodities. A CFTC redress program will resolve disputes involving commodity futures professionals. Investors can pursue actual damages in such cases. A CFTC investigation can help investors recover their filing fees. The NFA and FINRA have arbitration and mediation services. The arbitration process determines liability and damages. Most new account agreements require arbitration or mediation before they can proceed to litigation.
Futures traders are typically classified as either hedgers or speculators. Hedgers are those who try to predict market moves and make profits. Speculators do not intend to purchase the underlying asset and do not have any practical use for it. In contrast, investors are primarily concerned with achieving exposure to an underlying asset by buying long futures. The risk of trading futures is too great to bear for an individual.
To learn the basics of futures trading, traders should start out small. Some exchanges offer micro and E-mini futures contracts. For example, CME Group offers E-mini futures on the S&P 500, a futures contract one fifth the size of the flagship S&P 500 futures. Similar mini products are available in the energy, grain, currency, and metals sectors. Once traders are comfortable with a mini futures contract, they can gradually increase their order size.
A security futures contract often requires a physical delivery. The investor holding the futures contract would need to deliver the underlying security. If the buyer is short, the investor would be responsible for the goods’ delivery, material handling, and storage.
They would also need to insure the goods. A major benefit of futures trading is that it is much more liquid than traditional investment. So it’s easy to see why this method is more convenient and lucrative than other forms of financial trading.