The Basics of Trading Futures

Futures are a type of derivative that give investors exposure to the price movement of an underlying asset. That underlying asset might be a physical commodity like soybeans, coffee or oil; an exchange-traded fund, stock or cryptocurrencies; or a financial instrument like interest rates, equity indexes or debt instruments. The contracts are standardized to make them easier to trade, and can be used for speculation as well as for hedging.

The futures market isn’t for everyone, but it’s a valuable tool for many kinds of investors and businesses. It provides a best-guess estimate of the short- and long-term path of commodities and financial products that affect all of us in some way. And, since the futures markets are highly liquid, they’re often easy to trade with low transaction costs.

The most common use for futures is hedging. For example, if you owned shares of the companies listed on the FTSE 100 and were worried that their value would fall, you could go short (sell) a FTSE 100 index future in hopes that your profits will offset some of your share position losses. Because of the risk involved in losing money on a hedging position, brokers require a deposit or “margin” equal to about 20% of the contract’s total value to protect against unfavorable market movements. This margin requirement can change periodically as the market moves. The months for a specific futures contract will vary, and the June example used here is for illustration purposes only.

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