TRADING CFDS ON FUTURES
A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price. All those funny goods you’ve seen people trade in the movies — orange juice, oil, pork bellies! — are futures contracts.
Futures contracts are standardized agreements that typically trade on an exchange. One party agrees to buy a given quantity of securities or a commodity and take delivery on a certain date. The selling party to the contract agrees to provide it.
The futures market can be used by many kinds of financial players, including investors and speculators, as well as companies that actually want to take physical delivery of the commodity or supply it. To decide whether futures deserve a spot in your investment portfolio, consider the following:
How do futures work?
Futures contracts allow players to secure a specific price and protect against the possibility of wild price swings (up or down) ahead. To illustrate how futures work, consider jet fuel:
An airline company wanting to lock in jet fuel prices to avoid an unexpected increase could buy a futures contract agreeing to buy a set amount of jet fuel for delivery in the future at a specified price.
A fuel distributor may sell a futures contract to ensure it has a steady market for fuel and to protect against an unexpected decline in prices.
Both sides agree on specific terms: To buy (or sell) 1 million gallons of fuel, delivering it in 90 days, at a price of $3 per gallon.
In this example, both parties are hedgers, real companies that need to trade the underlying commodity because it’s the basis of their business. They use the futures market to manage their exposure to the risk of price changes.
More than commodities
Commodities represent a big part of the futures-trading world, but it’s not all about hogs, corn, and soybeans. You can also trade futures of individual stocks, shares of ETFs, bonds, etc.
Some traders like trading futures because they can take a substantial position (the amount invested) while putting up a relatively small amount of cash. That gives them greater potential for leverage than just owning the securities directly.
Most investors think about buying an asset anticipating that its price will go up in the future. But short-selling always investors to do the opposite — borrow money to bet an asset’s price will fall so they can buy later at a lower price.