Learn Commodities Trading – What Do I Need To Know About Futures Trading?

We assume that you are familiar with the basics of commodities – what they are and the different types of trading. In this article, we will delve in a little more into the futures trading, which is the most common found on many markets these days. Because it is the most common, here we will take a closer look.

A lot of times, commodities like oil are most commonly traded in future trades. For example a barrel of oil can be marked at seventy dollars on a contract for a future trade. The date of expiration will be on this contract, as well as the name of the company it is for. This name must be specific to be of any quality on the contract. This can help differentiate the place the person is expecting the oil to come from, because there are so many places it can come from.

Another very important aspect that should be discussed in intro to commodities part 2 and in regards to future trading is the price. The price itself is very closely related to the company it comes from. That is part of the reason it is so important to state on the contract, where the oil is being purchased. Or whatever the commodity may be at the time. As far as oil, the company affects the price because there are different production processes, refining processes and shipping costs and compositions.

Coming back to the original example in our intro to commodities is the fact that seventy dollars is being asked for this barrel of oil. This means that a small amount of this total must be paid up front. This is called a margin. Lot’s of different things affect this margin, but five percent is usually the average one. The contract will usually state how much oil they want and the five percent is determined from the total.

The main thing to remember in commodities is the date. The date when the product is due, in this case the oil, is very important. There are specialists who actually deal with the oil themselves, but the trader will have to ensure this happens. Otherwise there are lots of losses that can happen from this. However if the spot price, or the price of this oil at any given time, changes the contract must change to fit this information. Once this contract is signed, the trader is obligated. All details are best worked out ahead of time.

As you can see from this article, there is more to future trading in commodities than meets the eye. A lot of future trades in commodities are a lot more complicated. But this brief overview of the main way that commodities are traded should help you out.

How Online Future Trading Works

A contract, which is usually an agreement between two parties to buy and sell an asset at a specified time at a specified price, is known as future trading. Future trading is generally carried out on a futures exchange. A futures contract has a standardized date and month of delivery, price and quantity.

Futures are different from forwards in the sense that margin and delivery requirements are different. The futures exchange gives certain standard features for a contract to facilitate liquidity in futures trading. A futures contract may be set before maturity by having an equal and opposite transaction, which is the way majority of the transactions are held.

Expiration date is the date specified in the options or futures contract. The price at which the futures contract trades in the futures market is the futures price and the expiration date is usually the last Thursday of the respective month. Futures contractors are available in three series, having one month, two months and three months expiry cycles. A new contract of three-month expiry is introduced for trading on the Friday following the last Thursday.

Since many types of players are involved in trading futures, it helps in the process of proper price discovery. Apart from this, futures contracts also help in hedging of price risk commodity. Futures contracts are highly useful for the producer due to the fact that he gets an idea of the price that may prevail, which in turn helps him quote a realistic price.

On line future trading assists people to trade and exchange on the futures market and online futures trading allows the traders to scan the most recent exchange offers. The trader can send an order straight away into the exchange trading engine and also get the feed back or confirmation of the contracts instantaneously through on line futures trading.

In this way the trader is able to view a live market on the screen and interact with it.

On line future trading has a lot of advantages. The prices of the derivatives traded on the futures market are updated immediately and in real time through online future trading. Due to this interactivity the individual trader gets transparency of the market and good trade speed .It is possible to access the futures market from any computer with an Internet connection through online futures trading and trade on the important electronic futures exchange, around the globe.

To ensure smooth functioning of the futures trading done at the exchange there are certain inherent systems like the futures rolling settlement. Under the futures rolling system, all the trades that are unfinished at the end of the day are settled. The buyer has to necessarily make payments for the securities bought by him and the seller has to deliver the securities sold by him.

Another system that is in vogue is the weekly settlement system cycle wherein the transactions done during the week are squared off on the last day of the cycle, which means that a trader gets a longer time to speculate. When it comes to the question of trading futures for a living, trading futures is certainly a better choice than investing in equities.

Futures Trading Guide – Everything You Need to Know

Similar to the Options trading, Futures trading also deals with the trading of contracts or bonds. Its contract, which is known as the “Futures contract,” is an agreement between the seller and the purchaser regarding a specific product at a definite amount and time. This agreement however, is determined by the trading market.

Future trading guides are particular about the Futures price. As this type of trading is done in popular futures exchanges, the futures price greatly settles based on the law of supply and demand. This scenario happens between the buying and the selling of the bond, when the trends are drawn based on this economic law.

In this type of trading, the buyers and the sellers anticipate high prices in the future. Largely, the cost of the contract remains in effect during this market situation. Fluctuations of the value cause the bonds to go low. Thus, transactions in this type of market are largely reliant on the profit margin than those commodities involved.

Terminologies in the Futures trading guide are also pertinent to the investor’s venture. These terms involve essential methodologies, that should be understood by futures traders most especially the novice ones. Thus, in this Futures trading guide, these terms will be discussed thoroughly.

One of the key terms that a Futures trader should know is the “settlement price.” The “settlement price” is the official final price in the futures contract or agreement at the closing stage of the trading session. This price remains fixed for a specific date, as dictated by the trade in the Futures market.

The “settlement date” or the “delivery date” on the other hand, is the date of Futures deliverance. This very date is relevant to the bond’s deliverance.

Owners of the Futures bond are under obligation of obtaining and delivering bonds in accordance to the rules of the contract. This is then the obvious dissimilarity of the Futures trader from the Options trader for Options buyers have rights to their assets but they do not have any obligation at all. Options traders have the choice whether they are going to execute a contract or not. In the Futures trade however, the buyers and the sellers are under no force in settling contracts during the delivery date. The sellers give the assets to the purchasers upon finishing a deal. If the money has been settled in the Futures bond, loss-incurring positions are shifted to profit making.

These insights are just a few of the pertinent information in the Futures trading. There are a lot of information that needs to be discussed and studied before one can ensure success in the Futures trading. This Futures trading guide is just a piece of the pie that a Futures trader should eat before getting involved in bigger deals in the Futures trading market. There are many terminologies, strategies and methodologies that should be remembered to ensure great profits after every transaction. It is important that you would master them to avoid risks of financial loss.

Author: Jeff C Daniels
Article Source: EzineArticles.com
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An Initiation To Commodity Futures Trading

How It All Began

Commodity futures trading, as we know it today, came about for the first time in Japan in the 17th century, where rice was traded in future contracts. It was a period when farmers and buyers came together and decided to commit to each other future prices negotiated on suitable terms in exchange of grain for money. For example, a dealer would agree to buy a ton of rice at the end of the next month for a certain price from a farmer. This would be ideal for both parties, as the farmer would know how much he would get for his rice in advance, and the buyer could plan to raise the money he needed for the purchase. Contracts such as these became more and more popular and common, and were even used as collateral for taking loans. If the buyer could not take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer could not deliver the goods, then he could hand over the contract to another farmer. Thus began commodity futures trading, as we know it today.

What Are Commodity Futures?

Today, most of the futures commodity trading exchanges are set up in a similar way. Members of the exchange do the actual trading on the floor. Stock stands for equity in a public company, and can be held as long as you want, whereas commodity futures trading contracts have a specified life. In the past, people used commodity futures trading methods generally to hedge risks and fluctuation in prices, or to take advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of the commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to buy the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. It is to be noted, however that, the delivery generally doesn’t take place. The contract is usually liquidated before its expiry. The entire trade is based on the idea that there will be no delivery, but we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading is done all over the world now.

Different Types Of Commodities

There are many types of commodities that are traded in the international market. These can be very broadly categorized into the following:

• Precious metals like Gold, Platinum, Silver, etc.,
• Metals such as Aluminum, Copper, Steel, etc.,
• Agricultural products like Rice, Corn, Oils, Cotton, Wheat, etc.,
• Soft commodities such as Cocoa, Coffee, Tea, Sugar, etc.,
• Livestock like porkbellies, cattle, etc.,
• Energy commodities like Crude oil, Gasoline, Gas, etc.

Futures Trading – The Advntages Of Trading Futures Markets

Trading futures contracts have several advantages over other investments:

1. Futures are highly leveraged investments. To ‘own’ a futures contract an investor only has to put up a small fraction of the value of the contract (sometimes as little as 2-3%) as ‘margin’. In other words, the investor can trade a much larger amount of the commodity than if he bought it outright, so if he has predicted the market movement correctly, his profits will be multiplied compared to the amount deposited as margin. This is an excellent return compared to buying a physical commodity like gold bars, coins or mining stocks.

If all this is a bit over your head, or you’re looking for a solid day trading strategy, I suggest you join me on one of my live webinars by visiting this site.

The margin required to hold a futures contract is not a down payment but a form of security bond. If the market goes against the trader’s position, he may lose some, all, or possibly more than the margin he has put up. But if the market goes with the trader’s position, he makes a profit and he gets his margin back.

For example, say you believe gold in undervalued and you think prices will rise. You have $3000 to invest – enough to purchase:

10 ounces of gold (at $300/ounce), or 100 shares in a mining company (priced at $30 each), or enough margin to cover 2 futures contracts. (Each Gold futures contract holds 100 ounces of gold, which is effectively what you ‘own’ and are speculating with. One-hundred ounces multiplied by three-hundred dollars equals a value of $30,000 per contract. You have enough to cover two contracts and therefore speculate with $60,000 of gold!)

Two months later, gold has rocketed 20%. Your 10 ounces of gold and your company shares would now be worth $3600 – a $600 profit; 20% of $3000. But your futures contracts are now worth a staggering $72,000 – 20% up on $60,000.

Instead of $600 profit, you’ve made a $12,000 profit!

2. Speculating with futures contracts is a position investment. You don’t have to literally store three tons of gold in your garden shed, 15,000 litres of orange juice in your driveway, or have 500 live hogs running around your back garden!

The actual commodity being traded in the contract is only exchanged on the rare occasions when delivery of the contract takes place (i.e. between producers and dealers). In the case of a speculator (such as yourself), a futures trade is purely a paper transaction and the term ‘contract’ is only used because of the expiration date being similar to a ‘contract’.

3. An investor can make money more quickly on a futures trade. Firstly, because he is trading with around ten-times as much of the commodity secured with his margin, and secondly, because futures markets tend to move more quickly than cash markets. Similarly, an investor can lose money more quickly if his judgment is incorrect, although losses can be minimised with Stop-Loss Orders. Our trading method uses stop-loss orders to protect capital and lock in profits and thus makes the method robust and dynamic.

4. Futures markets are usually fairer than other markets (like stocks and shares). These markets are regulated by independent authorities in every country in the world. The transactions are transparent and trading activity is reported daily. Transactions are placed through a Clearing House and finally all trades are guaranteed by the Exchanges. This means that there will always be a seller for every buyer and a buyer for every seller.

5. Most futures markets are very liquid, i.e. there are large volumes of contracts traded every day. This ensures that market orders can be placed very quickly as there are always buyers and sellers of a commodity. For this reason, it is unusual for prices to suddenly jump to a completely different level, especially on the nearby contracts (those which will expire in the next few weeks or months).

6. Commission charges are small compared to other investments.

Futures contracts offer traders simplicity, flexibility and cost savings. There are no costs attached to the leverage received and transaction fees are small which means futures are head and shoulders above all other leverage products. Futures are the second most liquid markets in the world which means that orders are filled immediately and at the desired price.

All in all, futures are the perfect traders market.

Futures Trading – A Beginners Guide To Trading Futures

What is Futures Trading? Futures’ trading is a form of investment which involves speculating on the price of a commodity rising or falling.

What is a commodity? Most commodities you see and use every day of your life:

the corn in your morning cereal which you have for breakfast, the lumber that makes your breakfast-table and chairs the gold on your watch and jewelry, the cotton that makes your clothes, the steel which makes your motor car and the crude oil which runs it and takes you to work, the wheat that makes the bread in your lunchtime sandwiches the beef and potatoes you eat for lunch, the currency you use to buy all these things…

… All these commodities (and dozens more) are traded between hundreds-of-thousands of investors, every day, all over the world. They are all trying to make a profit by buying a commodity at a low price and selling at a higher price.

Futures’ trading is mainly speculative investing, i.e. it is rare for the investors to actually hold the physical commodity.

If all this is a bit over your head, and you’re looking for a solid day trading strategy, I suggest you join me on one of my live webinars by clicking here.

What is a Futures Contract?
To the uninitiated, the term contract can be a misleading however the term is used because a futures investment has an expiration date. It is similar to other forms of short-term contract. You don’t have to hold the contract until it expires. You can cancel it anytime you like. In fact, many short-term traders only hold their contracts for a few hours – or even minutes!
The expiration dates vary between commodities, and you have to choose which contract fits your market objective.

For example, if today was June 30th and you think Gold will rise in price until mid-August. The Gold contracts available are February, April, June, August, October and December. As it is the end of June and this contract has already expired, you would probably choose the August or October Gold contract.

The nearby (to expiration) contracts are usually more liquid, i.e. there are more traders trading them. Therefore, prices are a true reflection of trading activity and less likely to jump from one extreme to the other. But if you thought the price of gold would rise until September, you would choose a back-month contract (October in this case).

Nor is there a limit on the number of contracts you can trade. Many larger traders/investment companies/banks, etc. may trade thousands of contracts at a time!

All futures contracts are standardised in that they all hold a specified amount and quality of a commodity. For example, a Pork Bellies futures contract (PB) holds 40,000lbs of pork bellies of a certain size; a Gold futures contract (GC) holds 100 troy ounces of 24 carat gold; and a Crude Oil futures contract holds 1000 barrels of crude oil of a certain quality.

A Short History of Futures Trading
Before Futures Trading, a producer of a commodity (e.g. a farmer growing wheat or corn) could find himself at the mercy of a dealer when it came to selling his product. The business of transacting between producer, agent and end-use needed to be legalised so that specified amounts and quality of product could be traded between producers and dealers within a specified time-frame.

Contracts were drawn up between the two parties specifying a certain amount and quality of a commodity that would be delivered in a particular month…

…Futures trading had begun!

In 1878, a central dealing facility was opened in Chicago, USA where farmers and dealers could deal in ‘spot’ grain, i.e., immediately deliver their wheat crop for a cash settlement. Futures trading evolved as farmers and dealers committed to buying and selling at a specified time in the future. For example, a dealer would agree to buy 5,000 bushels of a specified quality of wheat from the farmer in June the following year, for a specified price. The farmer knew how much he would be paid in advance, and the dealer knew his costs.

Not too long ago futures markets consisted of only a few farm products, but now they have been joined by a huge number of tradable ‘commodities’. As well as metals like gold, silver and platinum; livestock like pork bellies and cattle; energies like crude oil and natural gas; foodstuffs like coffee and orange juice; and industrials like lumber and cotton, modern futures markets include a wide range of interest-rate instruments, currencies, stocks and other indices such as the Dow Jones, NASDAQ and S&P 500.

Who Trades Futures?
It didn’t take long for businessmen to realise the lucrative investment opportunities available in these markets. They didn’t have to buy or sell the ACTUAL commodity (wheat or corn, etc.), in order to trade the price movement of a commodity. As long as they exited the contract before the delivery date, the investment would be a simple trade. This was the start of speculation in the futures markets, and today, around 97% of futures trading are speculative by nature.

The Significance of Future Trading

Future trading channels are very particular about the future price rates. Since this trading is done in famous futures exchanges, the price for future largely settles on the basis of demand and supply law. This situation happens between the trading of bond and contract, where the trends are made based on this fiscal law. In the future trading, the sellers as well as the buyers predict higher prices in future. For the most part, the cost of contract stays in effect throughout the whole market situation. Fluctuations in the value may cause lowering down of the bonds. Therefore, trading in this market is largely dependent on the profit margins than the cost of merchandise.

Futures trading terminologies are also important for the investor’s undertaking in this market. These terms includes essential methodologies, which should be clearly understood, especially by the novice futures traders.

“Settlement price” is one of the main term that is commonly used in the future trading. The “settlement price” is the final price established in the future agreement or future contract at the closing session of trading. This price is set for a specified date as ordered in the Futures market and remains unchangeable. On the other hand, the “delivery date” or the “settlement date” is the date of Futures deliverance of the bond.

Owners of the Futures contract are under the compulsion to obtain and deliver bonds as per the contract rules. This is completely different from the option trade, where the options buyers possess absolute rights to their assets and do not have any to undergo any type of obligation.

In the Futures trading, the buyers and the sellers are under no obligation to settle the contracts within the specified delivery date. On the completion of a deal, the sellers provide the assets to the purchasers. If money is settled in the Futures contract, then the loss incurring situations are changed to profit making.

The above mentioned features are just a small insight to the Futures trading. There is a plenty of information which needs to be studied and discussed before you can actually venture the future trading and become successful. There are many things that need to be considered before getting involved in the future trading market. You must be well aware of the terminologies, methodologies and strategies related with future trading to ensure higher profits in every deal. It is essential to master them well in advance to avoid any financial losses in future.

Author: Michael Antony
Article Source: EzineArticles.com
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What Are Futures?

In the world of finance, there are many uncommon and niche terms used, which are alien to the rest of the world. ‘Futures’ is one of those terms that is used to identify a form of a financial contract. Futures Contract is a standard contract, to buy or sell a certain asset at a certain date in the future, at a specific time. Usually futures contracts are traded on a futures exchange.

The futures contract detail the quality, quantity and the price of the underlying asset. Usually there are many motives for making a futures contract. Since it is a business agreed to be performed in the future at a specific time and for a specific price, the buyer of the underlying asset is protected against the price fluctuations of the asset in the market. This may result in profit or sometimes, a loss to the contract holder as there is an obligation to buy or sell at the specified price.

Many contracts in the financial world assign the ‘right’ to do something to the contract holder. Futures contracts differ in this aspect by assigning ‘right’ and ‘obligation’ to the contract holders (both parties) for performing what the futures contract details. Some futures contracts call for a physical delivery of the asset and others are settled in cash.

Many assets, especially commodities are subjected to futures contracts in futures exchanges. As an example, there is seller who would like to sell a high volume of corn at the next harvest. Although, the corn is not produced yet, the producer wants to make sure that a proper price is paid for the corn in the future. Then there is a buyer who is looking for corn from the next crop, who will be willing to pay the current market price for it or something similar. In this case, the seller and the buyer can form a futures contract on a specific price, through which both the seller and the buyer are protected against the high price changes.

There are two main traders of futures; hedgers and speculators. Hedgers are interested in the asset subjected to the futures contract and they seek to hedge out the risk of price changes. Speculators usually have no interest or practical use of the assets subjected to the futures contract. They usually buy futures for selling them later with profit to interested parties.

Futures and ‘Forwards’ looks the same in the finance market but they have two significant differences. Firstly, Futures are traded in Futures exchanges, but forwards are traded over the-counter. Secondly, Futures have a less credit risk while forwards carry a high risk.

Author: Zoran Maksimovic
Article Source: EzineArticles.com
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The Futures Markets

One hallmark of a free market system is risk. Most producers (as well as consumers) face the risk that prices of goods (or commodities) they produce will change between the time they invest their resources to produce the goods and the time they are ready to sell their output. While in some cases long-term supply contracts at prearranged prices can be made, most prices, especially those of financial assets, commodities, and raw materials, are subject to almost constant fluctuations. Futures markets reduce the uncertainty and risk associated with these fluctuations by allowing market participants to enter into contracts, called futures contracts, which fix the price of a specified asset at a future date.

Futures contracts help the realmarket participants by facilitating hedging and help investors by making speculation easier. A futures contract is an agreement between two traders to exchange an asset at a predetermined future date (called the delivery date) at the “futures price.” In the case of futures markets, the “asset” has been standardized as to the quantity, quality, the delivery point, and the date of delivery. The trade may take place at a “futures exchange” or “over-thecounter” (OTC)-a service provided by many financial institutions. OTC market allows large transactions to take place at lower cost and without the risk of moving the market price. Almost all transactions now take place over the phone or electronically, replacing the close physical contact that used to characterize trading on exchanges.

A futures contract differs from a “spot” contract mainly in terms of the date of execution of the contract: A spot contract is executed immediately after the contract is made whereas a futures contract is executed at a prearranged future date. A futures contract differs from a “forward” contract in that the futures contract is for a standardized asset whereas the asset in a forward contract can be tailor-made. The oldest futures exchange in the United States, the Chicago Board of Trade was established in 1848. Futures contracts in tulips, however, were traded in Holland in the 17th century. Commodities, raw materials, and financial assets including interest rates and currencies form the bulk of the assets traded on the futures markets. There are, however, futures contracts for many exotic assets like weather.

The Chicago Mercantile Exchange offers futures contracts on snowfall, “cooling” or “heating” degree days in the United States, Canada, Europe, or Asia-Pacific, and even a future contracts on hurricanes. Futures markets facilitate the process of “price discovery” by providing information on current and possible future prices as assessed by market participants based on available information. This process is facilitated because futures markets provide improved liquidity and reduce counterparty risk for buyers and sellers of contracts over alternative arenas where comparable contracts could be traded. Improved liquidity comes from standardization of contracts, which makes trading easier for speculators.

Since all the characteristics of an asset have been standardized, a speculator can focus on the single element of the assets that is of interest to him/her-the price. Futures markets reduce the risk for traders by a practice called mark-to-market. Futures exchanges reduce the counterparty risk for a buyer or a seller in two steps. First, the buyer (or seller) of a futures contract enters into a contract to buy (or sell) a futures contract with the futures exchange, not with the trader who may enter into the opposite side of the transaction-in this case, the entity who may sell (or buy) the futures contract. This reduces the nonperformance risk, or the counterparty risk, from that of an unkown (and sometimes a higher-risk) seller to that of an exchange. As long as the buyer believes that the futures exchange will not become illiquid, there is no counterparty risk.

Second, the exchange reduces the nonperformance risk for itself by taking two related steps. First, every buyer (as well as every seller) deposits a “margin” usually equal to 10 percent of the value of the contract with the exchange when the futures contract is bought (or sold). Second, every contract is “marked-to-market” every day. At the end of every trading day, the exchange calculates the current value of the contract. If the price movement during the day has resulted in a loss of the value of the contract, the loss is deducted from the margin and the buyer is sent a “margin call.” This margin call requires the buyer to add funds to the margin so that it once again equals 10 percent of the value of the contract. Similarly, the exchange pays the day’s profits to the buyer of the contract should the price movement have been in favor of the buyer.

Should the buyer not respond to the margin call, the exchange can liquidate the contract on the following trading day and prevent any further losses on the contract. With this practice of marking every contract to market every day, the exchange faces no performance risk unless the price movement during the day exceeds 10 percent against the buyer and the buyer decides to default. Futures markets are regulated by Commodity Futures Trading Commission in the United States. The objective of the regulation is to protect public and market users from fraud, manipulation, and abusive practices. Futures markets contribute to the economic welfare of a society by increasing efficiency through centralization of services to all users of an asset.

They help users of assets in reducing risks by being able to hedge future transactions. They also help the economy by lowing “synthetic securities” to be created, which allow better management of risk, especially of financial risks associated with changes in prices and interest rates. Futures markets, however, are subject to manipulation by large traders. A humorous example of such potential manipulation was illustrated in the Hollywood movie Trading Places, which was released in 1983.

Author: Francesco Zinzaro
Article Source: EzineArticles.com
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Differences Between Stock Investing Vs Futures Trading

At some point, most serious stock traders and investors become aware of the futures market. There is a whole industry built around attracting new participants into commodities, as well as an entire industry catering to teaching how to trade futures.

(Note that I am using the terms “commodities” and “futures” interchangeably. Some in the futures industry use “commodities” to denote futures on agricultural, livestock, and other food products. They use futures to denote financial futures like stock indexes, bonds, and foreign currencies).

Most investors should “quit while they are ahead”, and avoid getting involved with futures. The surest way to build wealth is the stock market. Futures, on the other hand, are a good way to lose your money.

But, to provide a basic understanding, here are the differences between investing in stocks vs. futures:

1. The “future” in futures – When we buy or sell shares of a stock, we are actually buying or selling the stock today. With futures, you are actually entering into a contract to buy or sell a certain amount of a product at a certain date in the future. From a fundamental point of view, this means that a stock investor is trying to analyzing supply / demand for today. The futures trader is trying to analyze how supply / demand will be in the future.

2. Specific contract sizes – A stock market investor can buy or sell as many shares as they want. A futures trader is limited to trading in specific contract sizes. For example, I can sell 1 share of IBM stock, but I can only trade corn futures in multiples of 5,000 bushels. This makes it hard to use re-balancing formulas (a very powerful method in stock trading) with futures.

3. Leverage – A stock trader can, at most, use 50% leverage. This means that, if they have $100, they can buy $150 worth of stock. Futures traders, on the other hand, can use almost 90% leverage. For example, at a price of $2.54 per bushel, a futures contract of corn is worth $12,700. The margin to buy or sell a corn contract, however, is only $2,000. This means that, for $2,000, you can control $12,700 of corn.

At this level of leverage, a 15% increase in corn prices will double your money. But, a 15% decrease will wipe you out. If corn prices fell 30%, you would lose double the value of your account, and would have to pay the difference.

This leverage is the critical factor with futures trading. This ability to make a lot of money fast is what attracts people to futures, but it has also been the cause of many bankruptcies, divorces, and suicides.

Ironically, the commodities themselves are less volatile than stocks. This makes sense, because there are more factors that can affect IBM than can affect corn. Growing grain is easier than running a multinational company. It’s the leverage that makes it volatile. Essentially, you are magnifying the price movements. The drawback is that a futures trader is more vulnerable to random fluctuations. This is why futures trading is more like gambling. Even if you analyze correctly, and price eventually reaches your prediction, a sudden, short lived price spike can wipe out your account.

4. Ease of short selling Since stock traders are actually buying and selling shares of stock, it is harder to sell short to take advantage of falling prices. Since you can’t create a share of IBM, you actually have to borrow shares through your broker. Then, you pay interest and dividends to the owner until you buy back the shares. With futures trading, going short is as easy as going long. Since you are entering a contract to buy or sell something in the future (rather than actually selling something), you just create a contract promising to sell.

5. Expiration dates With stock trading, once you own shares in a company, they are yours to keep until you sell them. You can own shares forever. With futures, they have a certain date at which they come due. If you don’t offset your contract before that date, you may have to deliver or take delivery of the product. For example, if you have a contract to buy 5,000 bushels of corn, and you don’t sell it before the date, you might start getting warehouse bills for your corn.

I hope this article has provided you with a basic understanding of futures vs. stocks. As I stated before, I think most traders are better off sticking with stocks. Futures are less forgiving and more random, so it is much harder to develop a system that has a sustainable edge over time.

Author: Praveen Puri
Article Source: EzineArticles.com
Provided by: Canada duty

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