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FUTURES TRADING RISKS

Please find below more information Futures Trading Risks. Just click on the links to get more information.

        

Risk Exposure in Futures Trading

Trading in the Futures market can be a rewarding and exciting way to invest.However, before beginning in this kind of market, it is important to understand the risks involved.

Many people in the financial sector partake in Futures trading, and indeed there are now people with many varied experiences and backgrounds who have Futures contracts, but that does not mean they are suitable for all.

Am I at Risk?

Yes. All traders, no matter how experienced, are at a high level of risk to their capital when entering the Futures market.

Some of the aspects and concepts of Futures trading are complex, and therefore may not be appropriate if you do not understand the nature of them.

What are the Risks?

Similar to other forms of trading, having a Futures account carries it with it a real and grave risk to your capital.

You stand to lose all of your invested capital plus possible additional funds to cover a loss.

Markets are extremely volatile, and can change quickly and sharply. Therefore, where a position may have seemed clear on one day, the next day it can be very different. It can be difficult to predict the way a market will move.

Leverage - A Double Edged Sword

Because leverage allows a trader to invest in a large asset without needing a large amount of capital, it appeals to a large number of people. Operating on margin means the trader does not need the full value of the commodity in order to take a position. That means gains can be multiplied - but so can losses.

If the market goes against you, you can lose the initial margin (usually around 10% of the overall value of the contract), plus the entire funds in your account. On top of that may be extra fees and any funds required to cover the loss.

Therefore, it is very important that you only invest as much capital as you can afford to risk - that is to say, money you can afford to lose.

Am I Legally Liable in the Event of a Loss?

Yes. Futures Exchanges are regulated by the FSA in the UK and all Exchanges in the world are regulated by a Government-led national regulating body. If you enter a Futures contract, you must be aware of your liabilities in the event of a loss. Be aware that should you make a loss, you are more than likely liable to make up the deficit to the broker.

If you are in any way unsure of your obligations on opening an account, make sure you contact your broker and clarify these before you commence.

Could I Lose All Funds on my Account?

As a Futures trader, you will be required to pay a deposit. This is called the initial margin, and will be set by your broker, but is usually between 2 and 10%.

Your could lose more than the balance on your account. Leverage trading means that you are controlling a much larger position than your initial margin.

You could lose the amount on your account and be required to pay outstanding balances to your broker.

What Can I Do to Reduce Risk?

There are many ways in which the wise investor can reduce risk exposure. But what is key to note is that none of these measures can guarantee the safety of the capital you choose to invest.

Some key risk management measures might include:

Do the Homework

Before entering the world of Futures trading, do some background research. There is a huge amount of material available on the subject. If you are not sure where to start, it might be a good idea to contact the FSA and see what material they can offer on the subject.

Futures trading carries an interesting history and has many and varied elements, so can be complex at first. It is not worth entering this market if you are not sure about the upsides and downsides involved, and the many strategies available.

Consider a Stop Order

Most brokers will offer this option. A Stop Order allows the trader to place a stop limit on their contracts. This means they can buy or sell a contract when the price reaches a specified level. Note however that Stop Orders cannot guarantee to stop a loss, and due to volatile markets, they also cannot be guaranteed to meet the specified price.

Clarify both your Exchange's and broker's rules and regulations regarding Stop Orders so that you know how much risk you are reducing.

Consider Independent Financial Advice

Before entering the Futures market, it is worth considering seeking independent financial advice.

Independent financial advisors can provide you with unbiased guidelines and advice on how to manage your money. They may be able to tell you that you are unable to afford investing capital in this market - in other words, that you do not have enough capital aside to treat as a risk.

Shop Around

It is worth shopping around and comparing Futures brokers. There are so many available, and most will differ slightly in the features they offer and vary in suitability for you. Some may offer account management which may carry additional fees. Check that you are clear on all fees and extra costs. Feel free to ask a broker if you are unclear. Note they are obliged to provide you with a full risk guide before you begin, and it is highly recommended that you familiarise yourself with this before you commences.

Make sure you only invest as much as you can afford to lose. While Futures trading can be a fascinating and rewarding way to invest, all traders stand to quickly and suddenly lose a lot of capital.

Important Note:

Which Way To Pay is an independent online comparison website. Please be aware that while part of our website content involves the review and comparison of a wide range of financial products, we do not in any way recommend or encourage consumers to open a Futures contract or to enter trade on any index, commodity, currency, stock or share. Please ensure you that are fully aware of the product before you begin Futures trading.

Which Way To Pay, while using reasonable measures to ensure that data on the website is accurate, is not aware of your personal investment aims, objectives or needs. Site content is designed for information and interest only.

We would encourage that if you are unsure as to your suitability for Futures trading, you seek independent financial advice.

The risks outlined here have been just some of those involved in Futures trading. While there are many positive sides to this type of trading, it is nevertheless important to realise what the risks are when dealing with such an exciting and potentially rewarding financial product. Once you are prepared it is up to you whether you employ Futures trading sensibly or without care or forethought.

        


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