Futures are contracts to buy or sell an asset at a future date at the agreed-upon price. Futures are traded on exchanges, and the most common futures contracts are for commodities such as oil, gas, gold, and wheat. Many people believe that you need a lot of money to trade futures. It is not valid. You can start trading with no more than $500.
Why trade futures?
Futures offer many benefits, including:
Diversification and leverage
Futures contracts can hedge against risk or speculate on price movements in other markets. For example, if you own a gold mine, you could hedge against the risk of a decline in the price of gold by buying gold futures. Futures contracts are leveraged instruments, which means that you can control a large contract with a relatively small amount of money. For example, with a 10% margin, you can control a $100,000 contract with just $10,000.
Transparency and efficient price discovery
The prices of futures contracts are published regularly and are available to everyone. This price discovery process helps to ensure that prices are fair and transparent. The futures market is an efficient way to discover the prices of commodities. The prices of futures contracts reflect the collective expectations of all market participants about the future price of the underlying asset.
Futures contracts are traded on exchanges, which provide a central marketplace for buyers and sellers. It reduces trading costs, as there is no need to find a counterparty to trade with.
In addition, futures exchanges offer many services, such as clearing and settlement, that make it easier and cheaper to trade futures.
What are the risks?
Futures contracts are leveraged instruments that can magnify both losses and gains. It is essential to understand the risks before trading. The following are some of the risks associated with trading futures:
Volatility and margin calls
Futures’ prices can be volatile, which means they can rapidly move up or down. It can lead to significant losses if you are not careful. When the price of a futures contract moves against you, you may be required to post an additional margin. It is known as a margin call. If you cannot meet a margin call, your position may be liquidated at a loss.
When you trade a futures contract, you enter into a contract with another party. This other party is known as the counterparty. If the counterparty defaults on the contract, you may suffer a loss.
It is essential to understand these risks before trading futures. You can find educational content about these risks by checking out futures trading.
How much capital do you need to start trading futures?
You can start trading with as little as $500. However, it is essential to remember that futures contracts are leveraged instruments. It means that they can magnify both losses and gains.
We recommend starting with a small account and mini trading contracts if you are new to trading.
Mini contracts are one-tenth of standard contracts and allow you to take more minor positions and risk less money. With your experience and capital growth, you can gradually increase the size of your accounts and positions.
What else do you need to know?
In addition to understanding the risks, there are a few other things you need to know before trading futures:
How to place an order and read a price chart
Orders for futures contracts are placed through brokers. Brokers charge commissions for their services. Futures prices are quoted in terms of per-unit prices. For example, if the price of gold is $1,200 per ounce, you can buy one ounce of gold for $1,200.
How to calculate your profit or loss
Your profit or loss is calculated by subtracting the price you bought the contract from the price you sold it. If you sold the contract for more than you paid for it, you would make a profit. If you sold the contract for less than you paid for it, you would make a loss.