Five Facts on Futures Trading

23 June 2009 - Mark Maffia (Which Way To Pay)

    



Five Facts on Futures Trading

 

Futures trading is an historical investment type and has grown from Ancient Greece and Japan to the cotton and corn exchanges of the Deep South in the USA to become a global market, easily accessible via the internet.  We have covered the main facts and risks in our Information Library, but for a quick overview here are Five Facts which are key to this exciting investment:

 

Most Futures traders will never see the commodity they are trading

 

This is one question that new traders ask – I’ve just bought a large contract of corn, what if it turns up on my doorstep?  Well, in most cases this will never happen unless the trader chooses to take delivery of the commodity.  That is because the exchange is set for a date in the future, by which time most traders will have offset the obligation – that is, they will have bought or sold the contract.

 

Futures trading is made on Margin

 

This means the trader pays an initial margin when they open a Futures account with the broker.  The initial margin is a percentage of the value of the contract and will vary according to fluctuations in the market and price movements.  This type of trading means profit and loss is made on the margin.  Most initial margins will be around 2 to 10% of the value of the contract.

 

Futures trading is Regulated

 

This may be something you take for granted, but not all online investment tools are regulated.  It is important therefore to check before you get involved, to make sure you are protected.  Futures trading is always regulated by the regulatory body of a country.  Therefore, in the UK futures exchanges are regulated by the Financial Services Authority (FSA).  No company may trade through an exchange if they are not regulated.

 

Leverage is both an Advantage and a Disadvantage

 

This is something most Futures traders will tell you – leverage is both your friend and your enemy at the same time!  This is for the simple reason that as an advantage, it means you can get trading by only paying a small margin – that is, a small percentage of the actual value of the commodity.  If you win a position, you will get the margin back on top of your win.  Leverage becomes your enemy in the event of a loss.  You can expect to pay in excess of the initial margin on a loss.  A loss means you may lose the entire funds in your account plus the initial margin.  Be prepared.

 

Choosing the Right Broker is Key

 

This may sound obvious, but it is really important to compare brokers before making a choice.  This is because they differ in fees and costs, so you want to make sure you are getting the best value money-wise but also service-wise.  Look at basic things such as the platform, the added features, the training facilities, the support, the risk management, the initial margin and the minimum and maximum trade size.  These will make all the difference to your trading experience.

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