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Watch this short video for details on initial margin, marking to market, maintenance margin, and moving money between your brokerage and futures accounts. Micro futures contracts are often offered at 1/10th or even 1/5th the size of standard contracts, so you can trade with less up-front capital. Check out trading insights for daily perspectives from futures trading pros. View futures price movements and trading activity in a heatmap with streaming real-time quotes.

Enable your existing account for futures trading

Forward contracts are used mainly by institutional investors today because of their unregulated nature. If you’re just getting started, we highly recommend spending some time trading in a virtual account until you’re sure you have the hang of it. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.

They use the futures market to manage their exposure to the risk of price changes. More advanced traders may want a platform that provides application programming interface (API) access to allow algorithmic trading functionality. Active traders should select a futures platform with a mobile trading app that lets them execute trades and manage positions on the go.

Five reasons why traders use futures

In typical futures contracts, one party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. These are financial contracts in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date. Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry. Futures also have expiration dates, so you need to be careful to roll over or close out positions so not to be stuck with physical delivery of unwanted commodities. To start trading futures, you will need to find a brokerage that offers access to these markets and then get approval.

Remember, you can close a futures contract trade before the expiry date of the contract arrives. That is, they enable you to receive increased market exposure for a small deposit – known as margin – and your trading provider loans you the rest of the full value of the trade. However, it would give you $300,000 in notional value, three times the amount by cash alone or through your margin account at your broker, for significantly less of an outlay in actual cash. The same applies to investors wanting to know how to trade futures. In this article, we’ll help you find out by taking a close look at what futures are and how they work.

Also, the daily settlement of futures prices introduces volatility, with the investment’s value changing significantly from one trading session to the next. Before trading futures, investors need to know several key elements about futures contracts to help determine position size and manage risk. We’ll use the popular E-mini S&P 500 futures contract offered by the Chicago Mercantile Exchange (CME) as an example. As its name suggests, a futures contract is a financial instrument through which a buyer and seller agree to transact an asset at a fixed price at a future date. Futures trading provides investors with a fast and cost-effective means of accessing global financial and commodity markets.

Financial Futures

The profitability of futures versus options depends largely on the investor’s strategy and risk tolerance. Futures tend to provide higher leverage and can be more profitable when predictions are correct, but they also carry higher risks. Options offer the safety of a nonbinding contract, limiting potential losses. Andrew is a writer with more than two decades of investing experience and a B.A. Andrew believes in combining technical analysis, fundamental analysis, and strict risk management principles to formulate his decisions. He has held various positions in the financial industry, including stock strategist, Senior Manager of Educational Content, and portfolio manager.

Getting Started with Futures Trading

With us, rather than entering into a futures contract directly, you can predict on the price of futures rising or falling with CFDs. If you think that the underlying price of a future will increase based on your own fundamental and technical analysis, you can open a long position. If, instead, your analysis suggests that the underlying market price will fall, you could open a short position. With us, futures trading works by using CFDs to predict on the price of an underlying futures market. CFDs can be used to go both long or short, meaning that you can profit from markets that are rising as well as falling – provided your predictions are correct. Hedging with futures enables you to control your exposure to risk in an underlying market.

Trading futures instead of stocks provides the advantage of high leverage, allowing investors to control assets with a small amount of capital. Additionally, futures markets are almost always open, offering flexibility to trade outside traditional market hours and respond quickly to global events. The index is 5,000 points, and the futures contract is for delivery in three months. Each contract is $50 times the index level, so one is worth $250k (5,000 points × $50).

For example, futures for a major index like the S&P 500 might have contracts expiring in March, June, September, and December. The contract with the nearest expiration date is known as the “front-month” contract, which often has the most trading activity. As a contract nears expiration, traders who want to maintain a position typically roll over to the next available contract month.

1. On the other hand, a futures trading plan that’s centered around fundamental analysis might generate buy or sell signals based on crop or energy inventory reports.
2. System response and account access times may vary due to a variety of factors, including trading volumes, market conditions, system performance, and other factors.
3. Futures trading involves purchasing and selling futures contracts – agreements to buy or sell an asset at a set price on a future date.
4. Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry.

American-style options give the holder the right, but not the obligation, to buy or sell the underlying asset any time before the expiration date of the contract. On the other hand, investors should understand that futures trading can be fairly complex and it can lead to overleveraging. It may also be difficult to juggle and monitor expiry dates, especially if investors trade multiple contracts. Finally, traders run the risk of having to take physical delivery of the underlying asset if they don’t close out or roll their positions into an offsetting the importance of not missing a step in the accounting cycle contract by the expiry date. As an investment tool, futures contracts offer the advantage of price speculation and risk mitigation against potential market downturns. Taking a contrary position when hedging could lead to additional losses if market predictions are off.

This article explores some of the benefits and challenges you may encounter while trading your futures. Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he’s a keen student of business history. Married and now living in Halifax, Nova Scotia, he’s also got an interest in equity and debt crowdfunding. When you consider that you’re not buying actual assets but derivatives of those assets, the mark-to-market process is the most sensible way to handle these bets.