What Are Futures?
To the uninitiated investor,
futures trading can seem a complex and best-avoided activity.
So what are futures anyway?
Anyone
who has bought and sold equities or bonds will find they
already understand the basics of futures trading and already
can at least partially answer the question -- "What are
futures?" It is just a small step to
mastering the details.
First, to understand what are futures, one needs to understand
what a futures contract is. Futures contracts are financial
instruments that involve the purchase or sale of an underlying
instrument at a set price on a certain date. They are also
sometimes known as derivatives, because their value is derived
from the underlying instrument. These underlying instruments
can be currencies, equities, commodities, bonds or any other
financial product.
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Futures
Trading Where to Start or
What Are
Futures?
Start by
reading a great deal about
trading. Then find a broker who
has several years’ experience
and good references. Start
small with your trading as the
risk reward is unlike anything
you have ever attempted
before.
The
experienced broker will charge
more in commissions that many
online brokers, but the
guidance while you learn is
worth the extra cost per trade.
Left to you own devices, you
will probably lose due to lack
of experience and then you
probably won't be wondering
what are futures
again.
Future
trading is difficult to master
and experience comes at a
price. Your risk tolerance may
be too high or too low. You do
not know until you are
trading.
A good
experience broker can help with
this learning curve and keep
you out of serious trouble
along the
way.
They
would not let you go on a
cruise and leave open positions
behind. They would probably
suggest closing a position
before a crop report. They
would be aware of the current
weather and crop conditions in
the grain states in the United
States.
You do
not get this kind of help from
most online brokerage firms.
They assume you know what you
are doing and therefore charge
smaller commissions to get your
business. The old adage of you
get what you pay for is alive
and well in futures
trading
What are
futures and how do you start
are valid questions with many
answers. The first answer is
know what you are getting into
and do not be blinded by the
prospect of making piles of
money. It can be done, but it
comes as a result of good
trading. Never forget that you
can always lose lots of money
too.
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For example, a contract might be to purchase 5000 oz of
silver at $11/oz in March. Hence in March the owner of this
contract pays the seller $11 multiplied by 5000, i.e. $55,000,
and in return gets 5000 oz of silver.
Futures contracts are listed on futures exchanges, such as
the Chicago Mercantile Exchange in New York, and thus investors
planning on futures trading use these exchanges. Just as with
equities or other financial instruments the prices of futures
contracts rise and fall on a minute by minute basis. Investors
who are futures trading hope to buy and sell the contracts at a
profit, but thre are risks involved.
I think the question --what are futures? -- has been
answered in this article.
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