Considering Trading Futures? Here’s Why You Should

by Tanya July 19, 2021

As recently as 2018, it’s thought that the number of futures and options that changed hands on global exchanges rose by a whopping 20.2% to 30.28 billion contracts.

This highlights the immense popularity of trading futures, which is a speculative investment vehicle that enables successful investors to secure returns that are disproportionate to their initial deposit.

But what exactly is a futures market, and what are the advantages of investing in this type of entity? Let’s find out.

What is a futures market?

In simple terms, futures are standardised contracts that are created for the purpose and sale of various financial instruments and physical commodities.

These contracts stipulate for future delivery on a regulated commodity futures exchange, while agreeing to buy or sell the instrument in question at a predetermined price and time in the future.

Agricultural products are amongst the most widely traded on the futures market, including corn, soybeans, wheat and livestock.

Energy products like natural gas and crude oil are also traded in this way, as are spot currencies and major assets like the US dollar and the Euro.

Why you should consider trading futures

At this stage, you’re probably considering the advantages of choosing to trade futures. Here are some of the most compelling:

1. Leverage

Leverage on futures contracts is created using ‘performance bonds’ (commonly referred to as margin), which is also the amount of money that you deposited by both the buyer and the seller of the futures contract to underpin the agreement.

However, the performance bond may only represent between 3% and 12% of the total value of the contract, with leverage enabling you to open and control positions that are disproportionately large.

As a highly leveraged vehicle, futures contracts can deliver substantial gains at the end of the agreement, and while they can also trigger disproportionate losses, the risk-reward balance is truly fascinating here.

2. Liquidity

The vast majority of futures markets are also highly liquid, which means that they can be bought and sold easily in real-time.

This is largely because they offer access to a broad range of products in a centralised marketplace, which in turn attracts investors from across the globe who trade millions of contracts during each 24-hour period.

Because of this volume, it’s easy for traders to execute orders of any size or scale, without triggering substantial price fluctuations or sustained volatility.

3. The need for a lower minimum account balance

Like the forex market, futures contracts don’t require investors to open their account with a large deposit.

This creates a far more accessible marketplace and one where leverage can help to create a more level playing field between institutional and retail investors.

However, while you can open a futures contract for just a few hundred pounds, it’s important not to over-leverage your position and commit an amount of capital that you simply cannot afford to lose.

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