Future Trading

The future trading is a business that gives you everything you have ever wanted from a business of your own . Many stock players label it as the world’s perfect business . It offers the potential for unlimited earnings and the real wealth . You could run at your own hours as well as continuing to do whatever you have been doing . You could operate the business entirely on your own , and could start with very little capital . You need not have any employees , so you seldom need the battery of attorneys , accountants or bookkeepers .It is interesting that you need not have problems of collection , for you seldom have any customers or any competition or advertisement fees . You do not need the office space , warehousing or a distribution system . All you need is a personal computer for transaction from anywhere in the world.

Futures Contract :
A futures contract is a standardized contract , traded on futures exchange to buy or sell a certain underlying instrument at a certain date in the future , at a specified rate . The future date is called delivery date or the final settlement date . The pre-set price is called as the futures price . The price of the underlying asset on the delivery date is called the settlement date .
A futures contract gives the holder the obligation to buy or sell , which differs from an option contract , giving the holder the right, but not the obligation . In other words , the owner of an options contract may or may not exercise the contract . The parties of a “ futures contract “ must fulfill the delivery on the settlement date .
The seller delivers the shares/commodity to the buyer , or , if it is a cash-settled future , as in case of stock futures . cash is transferred from the futures trader , who sustained a loss to the one who made a profit . To exit or close you position in an existing futures contract prior to the settlement date , the holder of the futures position has to offset his position either by selling a long position or buying back a short position , effectively closing out the futures position and its contract obligations . The futures contract is a standardized forward contract , which is an agreement between two parties to buy or sell an asset at a pre-agreed future point in time specified in the futures contract . Some key features of the futures contract are :

STANDARDIZATION :

A futures trading contract is highly standardized contract with the following details specified :

1. The underlying asset or instrument . This could be anything from a barrel of crude oil , a kilo of gold , or a specific stock or share .
2. The type of settlement , either cash settlement or the physical settlement . Most of stock futures are settled in the country by the cash .
3. The amount and the units of the underlying asset per contract . It could be the weight of a commodity like a kilo of gold , a fixed number of barrels of oil , units of foreign currency , quantity of shares , etc.
4. The currency in which the futures contact is quoted .
5. The grade of the deliverable . In this case of bonds , this specifies , which bonds could be delivered . This specifies not only the quality of the underlying goods but also the manner and the location of the delivery , in case of commodities .

How does the Future Trading work ?

There are two basic categories of futures participants : hedgers and speculators .
In general , hedgers use futures for protection against adverse future price movements in the underlying cash commodity . Take for instance , a major food processor , which cans corn . If corn prices go up , he must pay the farmer or the corn dealer more . For protection against higher corn prices , the processor could “ hedge “ his risk exposure by buying enough corn futures contracts to cover the amount of corn he expects to buy . Since cash and futures prices do tend to move in tandem , the futures position will be profit , if corn prices rise enough to offset cash corn losses .
Speculators are the second major group of futures players . These participants include the independent traders , and investors . For speculators , futures have important advantages over other investments :
If the trader’s judgement is good , he could make more money in the futures market faster , because futures prices tend , on an average , to change more quickly than the real estate or stock prices . On the other hand , bad trading judgement in the futures markets could cause greater losses than might be the case with the other investments .
Futures are highly leveraged investments . The trader puts up a small fraction of value of the underlying contract as margin , yet he could ride on the full value of the contract , as it moves up and down . The money he puts up is not a down payment on the underlying contract , but a performance bond . The actual value of the contract is only exchanged on those rate occasions when delivery takes place . Moreover, the futures investors is not charged interest on the difference between the margin and the full contract value .

Settling Futures Contract :

Futures contract are usually not settled with the physical delivery . The purchase or sale of an offsetting position could be used to settle an existing position , allowing the speculator or hedger to realize the profits or losses from the original contract . At this point , the margin balance is returned to the holder along with any additional gains , or the margin balance plus profit as a credit towards the holder’s loss . Cash settlement is used for contracts like stock or index futures that obviously cannot result in delivery .
The purpose of the delivery option to insure that the futures price and cash price of good coverage at the expiration date . If this were not true , the goods would be available at two different prices at the same time . Traders could then make a risk free profit by purchasing stocks in the market with the lower price and selling in the future market with higher price . That strategy is called arbitrage . It allows some traders to profit from very small differences in price at the time of expiration .

Risks of Futures Trading :

It is a good idea to take a long , sober look at the risks , before becoming excited about the substantial return possible from such trading . Reward and risks are always related . It is unrealistic to earn above-average investment returns without taking above-average risks as well . Most people are naturally risk averse . They dislike to big risks , especially financially risks . Perhaps you could relate to the point of view of humorist Will Rogers : “ I am not concerned about the return of my money as I am about the return of my money “ .
Futures trading had reputation of being highly risky endeavor . It is true that a high percentage of traders eventually lose money . Many people have lost substantial sums . However , its reputation is a highly risk-prone activity . Think of yourself walking in your favourite gambling casino . You decide to play roulette . The tble has a maximum of 5,000 limit on red , you should not be surprised if you immediately lost your 5,000 . On the other hand , if you made 5 bets , you could play for a long time and probably not lose very much at all
Futures trading resemble trade , where one who decides how to operate . He can make large bets or small ones too . One could trade futures carefully and risk as little as 1-2 percent of your trading capital on a single trade . You could trade a long time for this way and not lose your entire trading capital However , most people are not that much patient . The unfortunates who lose big are those who cannot control themselves . They take big risks and risk a large portion of their trading capital in an attempt to get rich quick .