Introduction to Trading Futures

Introduction to Trading Futures

What are futures?

In stock trading, ‘futures’ is shorthand for future contracts. Traders agree to a contract to buy an asset it’s current price but to pay for it at its expiration date sometime in the future. These contracts can be for index funds, commodities, precious metals, currencies, or bonds. The trader can then sell the contract to another trader before the expiration date often at a gain or loss.

Futures Contract

A futures contract is a legal agreement to buy or sell a commodity or other financial asset at a set price at a specified future date and price. 

Match the ticker symbols with the commodity exchange.

Commodity Futures Exchanges

Future exchanges are marketplaces that regulate the trading of future contracts between brokers and commercial traders for particular commodities.

Clearinghouse

The clearinghouse finalizes or “clears” transactions between the buyer and seller of futures contracts.

The responsibilities of the clearinghouse include reporting data, collecting margin payments, regulating delivery of assets, as well as the all the buying or selling of contracts.

Margin

The balance in an brokerage account that a trader can leverage as collateral for futures positions.

Initial margin is the minimum amount a trader needs to open a futures positions.

Maintenance margin is the minimum balance a trader is required to have in their account to maintain a futures positions.

if the balance in a trader’s account falls below the maintenance margin, a margin call will require a trader to deposit additional funds to cover his futures positions.

Margin requirements are set by the exchange and adjusted for volatility.

Rate of Return

The rate return is how much a future position profited or lost minus the commission, divided by the amount of money invested.

Analysis

Fundamental and technical analysis are important tools for forecasting commodity prices.

Fundamental analysis focuses on economic influences such as import/exports, inventories, and weather.

Technical analysis is the study of price patterns, volatility, and volume to identify trends.

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