Futures trading is becoming a growing phenomenon. Several individuals are going into it in droves on a daily basis. People are coming to discover the huge possibility of making a real profit from this market; hence their exodus into it. There is no part of the world where one can’t trade in futures. This then removes any kind of limitation to the trade.
This write up is designed to get the reader educated and enlightened on the whole idea behind futures trading. All you need to do is to take some time to read every bit of info revealed below.
What is futures trading?
Here is the definition of futures trading…the name actually goes a long way to describe what is done in futures trading. It involves speculation into the possible rise in the value of a particular stock or commodity.
The investor speculates on the possibility of the stock price either rising or falling. If the stock rises, the investor makes a profit, if it falls, the investor suffers losses.
It can then be said to depend totally on certain market forces. If the market force moves in favor of the stock that had been invested in, the investor will surely reap the profit.
A contrary movement of the determining forces will lead to loss. Anyone seeking to trade in futures will have to keep this in mind.
Advantages and Disadvantages of Futures Trading
Futures trading gives you the opportunity to invest in a market that is more flexible in comparison with stock trading. You can sell off your shares any time or day you feel like before the shares expire.
You don’t have to pay for the total value of the shares that you want to invest in. Instead, you pay only the amount dictated by the margin of the stock for that particular day.
One of the disadvantages in futures trading is that you do not hold your position for too long. In case things are going in your favor, you will be forced to lose progress on the expiry date of the shares in question.
Difference between Stocks Trading and Future Trading
Some people usually mistake futures trading with stock trading. The truth is that the two are somewhat different from each other.
It needs to be indicated also that the two actually have a common meeting point.
In stocks trading, you buy shares; the same thing is done in futures trading. In stocks trading, you can buy any number of shares on a particular stock.
In futures trading, each of the stocks has a specific number of minimum shares that can be bought. In stock trading, you pay for the total value of the shares that you buy. But when you trade in futures, you only pay for the margin of the quantity of stocks that you buy.
If you buy one hundred shares in stock trading and each share goes for $2, you will have to pay a total of $200 for the whole shares.
In futures trading, if you buy one hundred shares and each share costs $2, you will not have to pay two hundred dollars for the whole shares.
Instead, you will be asked to pay the margin for the shares that had been bought. The margin is determined on a daily basis.
If the margin for a particular stock is 20% for that day, you will only pay 20% of the total value of the stock. So instead of paying up to $200, you only pay $40.
How to Make Money from Futures Trading?
On each day, the value of the stock you have bought will either increase or decrease. If you are involved in stock trading, you will understand what I mean by rise and fall in the value of shares.
In case you buy a stock for $2 per share on a particular day and its value increases to $2.3 on the next day, you would have made a profit of $0.3 on each unit of share that you have invested in.
The numbers of shares you are able to buy when you trade in futures can then go a long way in determining the amount of money you end up making.
If you deal in large quantities of stock, you are sure to make lots of profit if things are moving your way. The reverse is the case if you buy a little number of shares.
Commodities that can be invested in…
When you trade in futures, you will have the opportunity to invest in several commodities apart from currency.
Some of the commodities include lumber, beef, wheat, steel, cotton, gold, corn and several other commodities.
You will also have the full freedom to decide the best commodity for you. Make sure that you make your choice based on the commodity you think will be in high demand shortly.
When to Sell Off Your Stocks?
When you trade in futures, you need to carefully consider the fact that you can’t hold the shares forever. You will have to sell off someday.
This is completely contrary to what is available in stocks trading.
Your profit making or loss sharing in futures trading comes to a halt on the last Thursday of every month.
If you had been making a profit all along, the profit will be credited to your account. If you had been losing, it will also be debited from your account.
In case you do not want to wait till the last Thursday of the month before cashing in on your profit or loss, you can always opt out by selling off the stocks you have bought at the current price for the day.
It can be wonderful to make money from futures trading. In order to do this profitably enough, you need to consider every bit of info that I have revealed above.
Use this information as your guide through the tricky waters of futures trading and you will never have cause to slip when you trade in futures.
Most importantly, never make the mistake of equating futures trading with stocks trading; both are different trading methodologies.
Any futures trading tips from you? Share below…