What is Futures, Trading Indices, Commodities and Stocks

What are Futures

Futures are traded in contracts, this is a contract is an agreement between two parties who agree to sell or buy a commodity or a financial instrument at an agreed preset price at a later date in the future.

The quantity of the contract is specified

The date of delivery date is also specified

The above specifications are also specified in the contract. These are referred to as "specifications"

At the opening of this contract, everything is set but not the opening price (delivery price is set, this is opening price for the start of the contract trading.)

Futures can either be Commodities or Financial Instruments

Commodities - Gold, Silver, Cofee, Wheat, Corn, Soybean, Oil, Natural Gas

Financial Instruments - Shares, Stocks, Indices such as Nikkei, Dow Jones, DAX, FTSE, NASDAQ, S&P, SMI, Euro Stoxx and Cac 40.

Unlike Forex, The Futures market is centralized, these financial instruments are traded in a centralized market, meaning that all trades take place in one central market. This also makes the futures trading highly liquid and there is always a buyer or a seller willing to buy any contract at any time. Traders also prefer to trade these contracts in the electronic market more than they prefer to buy or sell them in the form of physical goods.

However, contracts have dates when they expire, when a contract expires it is liquidated and then the physical goods are delivered to the owner of the contract. If you are trading the futures of commodities such as coffee then you will get coffee delivered to your door if you do not liquidate your contract before the expiry date. To avoid this most brokers will automatically liquidate all contracts before the delivery date so that traders keep their money and not get the physical good delivered to them.

How Futures Work

For example a wheat miller agrees with a farmer who is starting to plant wheat, that after three or four months when the wheat is ready for harvest, the wheat miller will buy the wheat at for example $1000 dollars per 1 contract specification. And then for the next three months these futures contracts start to get traded in the market. If at the end of 3 months, the delivery date, the price is at $900 for the contract, the farmer will still get the $1,000 dollars as agreed, and you as the trader will pay the difference and make loss of $100, on the other hand if by that time the value of the wheat contract future is 1,200 the farmer will get the $1000 dollars and you will make a profit of $200, from this trade.

Therefore, the farmer is sure after 3 months; he will get paid $1,000 dollars per the contract specification produced irrespective of whether the price of wheat in the market goes up or goes down within that period.

However, a futures contract will get traded my many traders within these three months and most traders will speculate by trading a contract and holding it for a duration ranging from minutes, hours, days or even weeks. A trader will speculate for an up or down move from which they can make a profit.

This means that futures contracts are monitored every day and profits and losses for the day are credited to the investor that is currently holding the contract.

How to Trade

Just like Forex, the futures trading market is also leveraged. Therefore instead of buying 10,000 dollars worth of shares as it is in the stock market, you can trade these shares in the futures market and buy for example 5 times the value of your money if you use a leverage option of 5 times. This is what makes the future market more attractive because of Leverage as traders can trade more with the option of leverage.

The futures market contract are also subject to expire within a time duration after which this particular instrument will not be available for trading because after this date the contracts are settled and the physical commodities specified in this contract are delivered.

Commodities

In Forex Trading Platforms the most readily available futures that can be traded in the exchange market through many Forex brokers include: Gold, Silver and Oil.

Indices

E - mini futures are available for electronic trading. These eminis are popular because of their liquidity and the leverage options offered to trade them. Indices in the financial markets can be traded as futures contracts, the index is drawn as a chart and this chart is then traded as a financial instruments. (e minis are smaller contracts of the Maxi futures contracts, Maxis are only traded by Floor traders and not online, e minis on the other hand are designed specifically for electronic trading through online computers. Eminis move $50 while Maxi Contracts move $250 per point)

The E - minis are therefore the most common type provided for trading by most online Forex brokers as the eminis are designed for computer electronic trading.

Examples include : Nikkei, Dow Jones, DAX, FTSE, NASDAQ, S&P, SMI, Euro Stoxx and Cac 40.