Future Trading: What is Future Trading & Its Benefits?

For anyone looking to trade, there are various types of financial markets you could invest in. All one needs is to find the right means by which to invest in them. The most popular method of investing in most financial markets today is via futures trading. Trading in futures is considered a fair, high-leverage and cost-effective method of making your trading investments.

What is Futures Trading?

Futures trading essentially refers to trading by the means of futures contracts. Here is how futures contracts work:

A futures contract is an agreement between two parties to buy or sell an asset at a future date at a price agreed upon by both.
These futures contracts are standardized agreements and the payment as well as delivery of the asset is made on the date as specified.
Futures trading with the means of futures contracts can be done with any asset traded in a financial market. These could be stocks, currency, bonds, commodities or market index.
Futures contracts basically use the trading account, as well as technical and fundamental research guidance, to determine the prices of the assets they are investing in. They are derivatives in nature, which means that their value is only determined by the asset being traded.
A trader may not even wish to receive the asset and might own it with the intention of selling it off at a favourable opportunity. With these futures contracts, traders freely pursue the philosophy of ‘buy low, sell high’.
Futures contracts can be traded between a number of players. For the most part, however, they are traded largely by two groups of people:
- Hedgers: Such as banks, companies and producers of commodities who wish to protect their business from the effects of fluctuating prices.
- Speculators: Such as traders and private investors who aim to make profits.

What are Futures Markets and Types of Futures?

A wide variety of financial and commodity-based futures are available for trading, covering indices, currencies, debt instruments, energy, metals, and agricultural products. Here are some examples of futures contracts that you can trade, though this is not an exhaustive list:

Financial Futures: These include futures on market indices and interest rates. Index futures give traders exposure to market indices, while interest rate futures are tied to the interest rates of specific debt instruments.

Currency Futures: These contracts allow traders to speculate on the exchange rates of both real and virtual currencies.

Energy Futures: Energy futures provide access to the prices of commonly used energy sources. These are utilised by businesses for production and transportation, as well as by governments and individuals for consumption.

Metal Futures: Trading metal futures enables speculation on the prices of various metals that are essential in manufacturing and construction, such as gold for electronics or steel for construction.

Livestock Futures: These futures involve trading contracts based on the prices of live animals, which are critical in the meat production, processing, and distribution industries.

Grain Futures: Grain futures cover raw grains used for animal feed and for processing into products like ethanol and corn syrup, as well as processed products like soybeans.

Food and Fibre Futures: These contracts provide exposure to the prices of agricultural products, known as “Softs,” which are cultivated rather than mined or extracted. This category also includes dairy products.

This broad spectrum of futures allows traders to engage in diverse markets and hedge against various risks.

Advantages of Futures Trading

There are various reasons why trading in futures is considered preferable for most. Here are some of the most important advantages of futures trading:

High Leverage:

A trader can buy a futures contract by paying only a small fraction of the contract’s value, as margin. If the market conditions are favourable, he can enjoy a considerable amount of profits.
Liquidity:

Due to the high number of futures tradingoccurring on a daily basis, the futures market is extremely liquid in nature. There is a constant flow of buyers and sellers, keeping the market flowing easily and quickly.
Cost-effective:Compared to other forms of trading, the commission fees for futures tradingis relatively low. This greatly helps maximise a trader’s profit.
Diversification:

With futures trading, traders get a variety of assets to trade in. Futures contracts are available when dealing with asset classes such as stocks, commodities, currencies and so on. This helps traders diversify their investments and manage risks.
Easy entry to trading:

Futures trading is also a popular option since they are easy to access and serve as an easy entry into the world of trading. All you need is some capital, an internet connection and a reliable broker.

How to Start Futures Trading

For a trader looking to venture into futures trading, the path ahead is simple and easily accessible. Here is how you can get started trading in futures:

Get a fair idea of your capital investment, risk appetite and develop a proper strategy before delving into futures contract
Work on your strategies and refine them with a demo or trial trading account. This will allow you to trade in virtual money and develop your trading skills better.
Open a trading account, preferably with a reputable brokerage firm. They will then connect you to the relevant exchanges, such as the Bombay Stock Exchange or the National Stock Exchange, and start trading.

Conclusion

Due to its ease of access and many other benefits, futures trading is the default trading method for many traders. As with all investments, before venturing into futures trading, it is important to do your fair share of research. As someone trading in futures contracts, it is essential to work on developing the right trading strategies. This requires time, patience and trial and error.

Angel One provides traders with a trial trading account to practice developing new strategies. It also offers a variety of features to help them get started such as a technology-enabled DEMAT and trading account as well as technical and fundamental research guidance.