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How to trade futures

Buying futures is a straightforward process, but not every trading platform offers them.

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.

6 steps to trade futures

Trading futures is straightforward and not significantly different from trading stocks or exchange-traded funds (ETFs). Here’s how to trade futures:

    1. Choose a broker. Compare brokers that offer futures trading and choose one that best suits your needs. Established brokers like TD Ameritrade, Interactive Brokers or Charles Schwab include futures trading as part of their brokerage services. Newer investing platforms like Robinhood and SoFi don’t have these capabilities yet.
    2. Open an account. Provide information about your income, net worth and experience with investing. You will also need to apply for, and be approved for, a margin account and futures trading.
    3. Select a futures market to trade in. Choose between financial, currency, energy, agricultural or metals futures. Consider starting with a market you’re familiar with before branching into other sectors.
    4. Decide on a strategy. The three main futures trading strategies are speculating, hedging or diversifying.
    5. Identify the futures you want to trade. Brokerage platforms that offer futures trading often come with research tools to help you find the right future contract for you. Use it to search for futures contracts based on activity, technical pattern recognition by the platform’s screener or based on any other criteria that you set.
    6. Place your trade. Review your order of the futures contract and submit it for execution.

    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.

    3 main futures trading strategies explained

    • Speculating is mostly used for short-term price moves with the goal to profit from the price difference.
    • Hedging is mostly used to offset the risk of the assets in your portfolio.
    • Diversifying is used to gain exposure to assets that are hard to find elsewhere.

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    Information on this page is for educational purposes only. Finder is not an advisor or brokerage service, and we don't recommend investors to trade specific stocks or other investments.

    Finder is not a client of any featured partner. We may be paid a fee for referring prospective clients to a partner, though it is not a recommendation to invest in any one partner.

    How does futures trading work?

    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).

    Futures contract asset classes

    Numerous types of futures products are available for you to trade, but most can be grouped into four primary categories:

    1. Financial futures: Stock indexes, interest rates and currencies.
    2. Energy futures: Crude oil, natural gas, heating oil, etc.
    3. Agricultural futures: Corn, soybeans, wheat, etc.
    4. Metals futures: Gold, silver, copper, etc.

    Benefits of trading futures

    • Leverage. When trading stocks on a margin, typically you need to pay more than 50% of the equity value. With futures, the required margin amount is often less than 10% of the contract value. This gives you the potential for higher returns compared to other assets that use leverage.
    • Diversification. Futures give you the option to trade assets that aren’t typically available via stocks or ETFs, such as livestock or coffee beans.
    • Tax benefits. Profitable futures trades are taxed as 60% as long-term capital gains and 40% as ordinary income. With stock trading, profits on stocks held less than a year are taxed 100% as ordinary income.

    Risks of futures trading

    • Leverage. Just as leverage helps you earn more on profitable trades, it can also magnify your losses.
    • Time limit. Similar to options trading, futures come with an expiry date. If you’re buying futures and the contract ends, you may be obligated to buy the physical assets.

    Bottom line

    • Futures trading is often used to speculate or hedge against the value of an asset at a set date in the future.
    • Trading futures is a straightforward process similar to trading stocks or ETFs.
    • Futures have several benefits over stocks, but the risks are also higher.

    Frequently asked questions

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