If you’re new to investing, it’s difficult to wrap your head around the many different assets you can trade. Stocks, ETFs and bonds are all relatively easy to understand, but some asset types are a little more complicated. So if you’re wondering what futures trading is and how futures contracts work, you’re in the right place.
What are futures in trading?
Futures are contract agreements between two parties. Those parties agree to buy or sell a particular underlying asset at a specified price on a nominated date in the future.
For example, a wheat farmer may be concerned that the price of wheat is set to fall before the next harvest. If they sell a futures contract for wheat and agree to deliver a certain amount of wheat at an agreed price on a specific date, they can protect themselves against potential price drops in the future.
Is futures trading available in Canada?
Yes, futures trading is available in Canada, but not on all online trading platforms. Most brokerages in Canada focus on providing stock and ETF trading for everyday investors. Trading futures comes with a high level of risk and is best suited to experienced investors, so futures are not widely available on stock trading platforms.
But the good news is that there are some online brokerages that offer futures trading in Canada.
What is the best futures trading platform in Canada?
The best futures trading platform in Canada for you depends on several factors. Your investing experience, the contracts you want to trade and how easy the platform is to use will all impact your choice of broker.
But if you’re looking for some of the best futures trading platforms in Canada, Interactive Brokers is worth checking out. Interactive Brokers offers low-commission futures trading on global markets, with a host of advanced trading tools to help experienced users make informed trading decisions.
Interactive Brokers is a leading online brokerage that provides access to over 160 global markets. It has competitive commissions and provides access to a huge range of trading opportunities, including futures. And with advanced desktop and mobile trading platforms to suit experienced investors, it offers all the tools you need to start trading futures in Canada.
Why it's one of the best:
Wide range of markets. Interactive Brokers lets you trade futures on commodities, indices, interest rates, currencies and cryptocurrencies across more than 30 exchanges around the world.
Competitive fees. Low commissions on futures trading with Interactive Brokers range from $0.25 to $0.85 per contract.
Advanced trading platforms. You can trade futures using advanced trading platforms like Trader Workstation and ComboTrader.
Pros
Access a huge range of markets and assets.
Platforms to suit beginners and experienced traders.
Over 100 order types.
Provides access to free futures trading educational resources.
Cons
Some advanced features may be overwhelming for beginners.
Watch out for withdrawal fees.
Monthly Account Fee
$0
Account Types
RRSP, TFSA, Personal, Joint
Available Asset Types
Stocks, Bonds, Options, Index Funds, ETFs, Forex, Currencies, Futures
You can trade futures on a wide range of underlying assets, such as:
Stock indices (like the Dow Jones and the S&P 500)
Metals (like gold and silver)
Energy (like crude oil and natural gas)
Agricultural commodities (like corn and soybean)
Currencies (like the Canadian dollar or the euro)
Interest rates (like US 30-year bond futures)
Cryptocurrencies (like Bitcoin and Ethereum)
Futures are traded on regulated exchanges. Some of the largest futures exchanges in the world include the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYME), the Chicago Board of Trade (CBOT), the National Stock Exchange of India (NSE), Eurex and the Shanghai Futures Exchange (SHFE).
What are futures contracts?
Futures contracts are an integral part of trading futures. A futures contract is a legal agreement between a buyer and seller to buy an underlying asset at a particular price on a specified date in the future.
The asset could be a commodity such as crude oil or wheat, a currency such as CAD or Bitcoin, an interest rate, or an index like the S&P/TSX 60.
Futures contracts are standardized and therefore highly transferable. For example, a standard gold futures contract represents 100 troy ounces of gold, while a standard wheat futures contract represents 5,000 bushels of wheat.
Futures contracts were first developed in the USA in the 19th century as a way for farmers to lock in prices for crops to be planted and harvested in the future.
Contracts set out the quantity of the asset being bought and sold, when it is to be delivered, how the contract will be settled, the price quote, and the minimum increment that the price of the contract can move.
How to trade futures in Canada
There are a few basic specifications you need to be aware of when opening a futures contract:
Underlying asset. This is the commodity or financial instrument that you agree to buy or sell on a future date, such as crude oil or gold.
Contract size. This is the quantity of the underlying asset included in the futures contract. The amount is standardized but varies depending on the asset in question. So while a standard crude oil contract represents 1,000 barrels, a standard corn contract represents 5,000 bushels.
Contract value. This is calculated by multiplying the contract size by the current price of the underlying asset. So if corn is trading at $400 a bushel, the value of the contract is $2 million (5,000 x $400).
Tick size. This is the smallest unit of price fluctuation for the contract.
Expiration date. Every futures contract comes with an expiration date, which is the last day it can be traded. However, most contracts are liquidated before reaching expiration.
Settlement method. When futures contracts reach their expiration date, they can either be settled in cash or with physical delivery of the underlying asset. But it’s worth noting that many brokers don’t allow physical delivery — for example, with the exception of some currency futures, Interactive Brokers does not allow its customers to make or receive delivery of the underlying commodity. Instead, you’ll need to roll forward or close out your position.
Leverage and margin
The other factor you need to be aware of when trading futures is that futures contracts use leverage. This means you don’t need to deposit the full contract value into your trading account when entering into a futures contract.
Instead, you’ll need to meet the initial margin requirement. This is a small percentage of the total contract value, typically 3% – 12%.
This means you only need to deposit a small amount of funds to open a large-value contract position. So if the market moves in your favour, you could achieve sizable gains compared to the small amount you invested — but conversely, any losses you suffer will also be amplified.
You’ll also need to be aware of the maintenance margin. Once you’ve opened a position, the maintenance margin is the minimum account balance you need to maintain in order to keep your position open.
What are futures CFDs?
CFD stands for contract for difference. A futures CFD lets you speculate on whether the price of a futures contract will rise or fall.
Like futures contracts, CFDs are leveraged, amplifying any gains (but also any losses). But unlike futures contracts, there’s no need to take on any obligation to buy the underlying asset on a set date and at a predetermined price in the future.
With CFDs, you don’t actually buy or sell the underlying asset; instead, you instead speculate on which direction the price of that asset will head. So futures CFDs provide access to futures markets without taking on the same obligations as futures contracts. However, they with their own risks and potential drawbacks too.
Brokers charge a commission when you trade futures contracts. For example, Interactive Brokers charges commissions of $0.25 to $0.85 per contract.
However, commissions may vary depending on the number of contracts you trade per month, with cheaper fees for frequent traders. The fee may also vary depending on whether you choose a standard futures contract or a micro contract. The exchanges where futures contracts are traded can charge fees too, while clearing and regulatory fees may apply.
Some brokers may also charge account fees or fees to access specific tools or services. For example, you may pay a monthly subscription fee to access real-time market data.
The other factor you need to consider is the margin requirement. This is set by your broker and outlines the amount of funds you need to open a futures position. For example, on a $30,000 contract with a 5% margin requirement, you would need to deposit $1,500.
How to choose the best futures trading broker
Consider the following factors when searching for the best futures trading platform in Canada for you.
Fees and commissions
Check what commissions the broker charges on futures trading. It’s also a good idea to check whether you’ll need to pay an ongoing subscription fee to access real-time market data.
Supported markets
Check how many global exchanges and markets you can access through your trading account. Can you trade futures on commodities, indices, interest rates, bonds, currencies and cryptocurrencies?
Research tools
Look for a platform that provides access to a wide range of market research tools and news services to help you stay up to date with the latest developments.
Ease of use
If the broker offers a paper trading account, trial its trading platform to ensure that it’s easy and intuitive to use. Watching how-to videos and reading reviews from other users will also help you work out whether the platform is a good fit for your trading needs.
Educational resources
If you want to increase your knowledge of futures trading and global financial markets, some brokers provide access to a variety of free educational resources and courses.
Customer support
Find out when the broker’s customer support team is available and how you can contact them. Look for live chat, phone and email support.
Regulation
Make sure the broker you choose is regulated by the Canadian Investment Regulatory Organization (CIRO). Check that they are also a member of the Canadian Investor Protection Fund (CIPF).
Hedgers vs speculators in futures trading
There are two ways to use futures as a trader: hedging and speculating.
Hedgers use futures contracts to manage their risk, providing a form of insurance when the market moves against them. The aim is to counteract any losses they may suffer due to their exposure to an underlying asset.
For example, a bank that provides mortgages to home buyers can use futures contracts to hedge against interest rate changes that could impact its profits. Alternatively, if you’re invested in S&P 500 ETFs with the expectation that the S&P 500 will rise, you can protect yourself against market volatility by going short on an S&P 500 futures contract.
Meanwhile, speculators trade futures with the aim of making a profit from price changes. When they think the price of an underlying asset will move in a specific direction, they trade accordingly. Speculators go long when they think the underlying market or asset will increase, and they go short if they think it will fall.
What are the potential benefits of futures trading?
Trade almost 24 hours a day. Futures markets are open close to 24 hours a day, 6 days a week, allowing you to trade outside of normal market hours and take advantage of global developments as they occur.
Leverage. You can trade futures contracts on leverage, which means you only need a small investment to control a large position. This provides the potential for increased returns.
Diversification. Unlike investing in stocks, when buying shares means investing in a single company, trading futures allows you to gain exposure to entire asset classes.
Low commissions. Fees for trading futures are generally quite low, so you don’t need to worry about broker commissions taking a big chunk of your profits.
High liquidity. Futures markets have deep liquidity, which means orders can be executed quickly.
What are the potential risks of futures trading?
Not suitable for beginners. Futures trading is complicated and best suited to experienced traders who can put effective risk management strategies in place.
Market volatility. Futures prices can be volatile and are affected by a wide range of economic and political factors, so the market could potentially move against you quickly.
Leverage. While trading on leverage can amplify gains, any losses you incur are also amplified.
Margin calls. If the balance of your futures trading account drops below the broker’s margin requirements, you’ll need to deposit additional funds.
How to sign up for a futures trading account in Canada
Want to sign up for an account and start trading futures? Here’s what you need to do.
Choose a trading platform. Compare brokerages to find the best futures trading platform for your needs. Look for low commissions, access to a wide range of markets and a user-friendly trading platform.
Complete an online application. Sign up for a trading account by providing your personal information and contact details. You’ll also need to provide details of your trading experience and information about the source of your funds.
Prove your identity. You’ll need to provide a government-issued photo ID to verify your identity.
Fund your account. Once your application has been approved and your account activated, you’ll need to deposit funds via bank transfer, e-Transfer, wire transfer or bill payment.
Start trading. When your money arrives, it’s time to place your first trade.
Futures trading has several benefits, providing an effective hedging tool to protect yourself against market volatility as well as the potential for profits for speculators. But futures are complicated and come with plenty of risks attached, so they’re best suited to experienced investors. Make sure you understand exactly what you’re getting into and all the risks involved before placing your first trade.
Frequently asked questions about futures trading in Canada
No, you don't need $25,000 or more to start trading futures. This misconception most likely exists due to FINRA's Pattern Day Trader rule for trading stocks in the USA, which requires day traders to maintain minimum equity of $25,000 in their margin account. Check your broker's margin requirements to find out what initial investment you'll need to start trading.
Futures and options are both leveraged derivative contracts. The difference between them is that with a futures contract, the two parties are obligated to buy or sell the underlying asset at or before a future date at a predetermined price. But with options, there's no obligation to buy or sell the asset at the specific price and date—you can instead choose to pay the premium and not follow through with the transaction.
Yes, you can use a paper or demo trading account to understand how futures markets work and test out trading strategies. Find out more about how demo accounts work in our paper trading guide.
Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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