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Futures trading is often used to speculate or hedge against the value of an asset, such as stocks, bonds, currencies and commodities at a set future date. Traders use this derivative to get higher leverage than they could get trading stocks. This comes with higher profit potential, but also with higher risk.
Trading futures is straightforward and not significantly different from trading stocks or exchange-traded funds (ETFs). Here’s how to trade futures:
Note: Make sure you understand the risks, margin requirements and expiration date of the contract before you place your trade. With futures, margin is the amount of money you must deposit when you open a futures position. This amount is usually 3% to 10% of the contract’s notional value.
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Futures are a type of derivative financial contract where two parties agree to buy or sell a specific amount of a commodity or financial instrument at a set future date. Unlike options that may expire worthless, future contracts end in the physical goods being delivered — like gold, silver or oil — upon contract expiry.
But most traders don’t take the physical assets. Instead, they use futures to speculate on the prices and earn a profit.
Financial institutions or large companies use futures as a hedge to offset risk in their portfolio. They may deliver or accept the physical goods after the contract has expired.
All futures contracts are typically traded through a centralized exchange like the Chicago Board of Trade or the Chicago Mercantile Exchange (CME).
Numerous types of futures products are available for you to trade, but most can be grouped into four primary categories:
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