What is Futures Trading & Why Trade Futures (2024)

FAQs

What is Futures Trading & Why Trade Futures? ›

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as the CME Group, the largest futures exchange in the United States.

Stock market futures trading obligates the buyer to purchase or the seller to sell a stock or set of stocks at a predetermined future date and price. Futures hedge the price moves of a company's shares, a set of stocks, or an index to help prevent losses from unfavorable price changes.

Narrator: One use of a futures contract is to allow a business or individual to navigate risk and uncertainty. Prices are always changing, but with a futures contract, people can lock in a fixed price to buy or sell at a future date. Locking in a price lessens the risk of being negatively impacted by price change.

That said, generally speaking, futures trading is often considered riskier than stock trading because of the high leverage and volatility involved that can expose traders to significant price moves.

Futures look into the future to "lock in" a future price or try to predict where something will be in the future; hence the name. Since there are futures on the indexes (S&P 500, Dow 30, NASDAQ 100, Russell 2000) that trade virtually 24 hours a day, we can watch the index futures to get a feel for market direction.

Futures are derivative contracts to buy or sell an asset at a future date at an agreed-upon price. That asset might be soybeans, coffee, oil, individual stocks, exchange-traded funds, cryptocurrencies or a range of others.

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as the CME Group, the largest futures exchange in the United States.

When trading futures vs. stocks, there are no rules requiring a minimum account balance or restricting how many trades can be placed in a week. As a futures trader, you can trade long or short multiple times a day or week without worrying about day trading restrictions.

If you trade in the futures market, you have access to more leverage than you do in the stock market. Most brokers will only give you a 50% margin requirement for stocks. For a futures contract, you may be able to get 20-1 leverage, which will magnify your gains but will also magnify your losses.

A futures contract allows its parties to buy or sell a specific underlying asset at a set future date. The underlying asset can be a commodity, a security, or some other financial instrument. These agreements are best entered after you've learned some basics, and should not be invested in on a whim.

What is an example of futures trading? ›

For example, gold futures trade in contracts for 100 troy ounces. So, if gold is trading for about $2,000 per ounce, each futures contract is $200,000 in value. Oil is measured in barrels, which are about 42 gallons, and each futures contract is for 100 barrels.

Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.

Futures markets are open nearly 24 hours a day, six days a week. But keep in mind that each product has its own unique trading hours.

Indicators like Volume Profile HD, Supertrend, RSI, and Bollinger Bands provide deep market insights, crucial for navigating the swift currents of futures markets. Whether it's identifying market trends, assessing volatility, or making quick, informed decisions, these tools are invaluable for any futures trader.

While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks. These advantages include greater leverage, lower trading costs, and longer trading hours.

Futures are contracts with expiration dates, while stocks represent ownership in a company. The following chart may help delineate the major differences between them.