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What is Investing Futures?
Investing futures is a way to invest in financial products whose price is determined according to the future market conditions. Futures involve two parties agreeing on a fixed-price contract regarding a certain number of specific assets or contracts, which will be paid when the deal is reached. The investor has to take a risk and understand the futures instruments, before entering a contract.
Why Invest in Futures?
1. Leverage: Futures provide leverage and amplify the investor return on capital. This means that the investor can gain more from a price change than the amount invested in the contract.
2. Trading: Futures are traded openly in exchanges, and this allows for greater liquidity and less chance for manipulation.
3. Low Margin: Margin requirements for trading futures contracts are often lower than those for stock or bond trading, which can increase the potential return of the investor.
4. Other Benefits: Investing in futures can also provide the ability to adjust the risk profile of a portfolio, as well as providing exposure to new markets or sectors.
Risks of Investing in Futures
1. Leverage Risk: As mentioned, leverage can increase the potential gain, but it can also increase potential losses if it goes against the investor.
2. Market Volatility: As with other investments, volatility of the market can cause sudden drops or jumps in the value of the asset which can result in significant losses.
3. Lack of Diversification: By investing in futures, investors may not be able to diversify as much as when investing in other asset classes.
4. Counterparty Risk: Investing in futures requires accepting some counterparty risk, as the other party involved in the contract is effectively promising to perform the wished action.
How to Start Investing in Futures?
1. Do Your Research: Take some time to understand the concepts and behavior of futures so that you can make informed decisions when investing.
2. Select an Exchange: Choose a reliable exchange to trade futures contracts. Different exchanges might offer different contracts or fees.
3. Set Up an Account: Most exchanges will require traders to open an account before they can start trading.
4. Understand the Risk: As mentioned above, there can be significant risks when investing in futures. Assess them and calculate what will be the most adequate size of position to ensure an adequate return with minimized risk.
5. Monitor Your Position: Monitor your position during the life of the contract to be able to react to changes quickly and correctly.
Frequently Asked Questions About Investing Futures
Q: What is a futures contract?
A: A futures contract is an agreement between two parties to exchange a certain amount of an asset or securities, at a predetermined price and date in the future.
Q: What are the benefits of investing in futures?
A: Investing in futures can provide leverage, liquidity, low margin requirements and the possibility to adjust the risk profile of a portfolio.
Q: What are the risks of trading futures?
A: Trading futures can involve leverage risk, market volatility, lack of diversification and counterparty risk.
Q: What do I need to start investing in futures?
A: You will need to do your research, select an exchange, open an account and understand the risk before trading futures.
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