Analysis of Futures Trading

2023-08-25
Summary:

Futures evolve from spot trade, broker-mediated. Players: investors, exchanges, brokers, clearing houses; sorted as producers, consumers, speculators.

Futures trading is an advanced trading method based on spot trading and developed from forward contract trading. It refers to the buying and selling of futures contracts in open competition through brokers on commodity exchanges for large quantities of homogeneous commodities in order to transfer the risk of market price fluctuations.


The participants in futures trading include investors, exchanges, futures brokers, and clearing houses. Investors can be divided into two categories: producers or consumers of physical commodities such as agricultural products, energy, metals, etc. They use futures markets to lock in future prices to avoid risks. Another type is speculators, who seek profits through futures trading and buy and sell futures contracts by predicting market trends.


The underlying assets of futures trading can include commodities, financial assets, stock indices, etc. Common futures contracts include Crude Oil, gold, soybeans, wheat, stock index futures, etc. The trading units, delivery dates, and delivery methods of futures contracts are clearly specified in the contract.


Futures are two-way trading and can be long or short. Futures trading has leverage tools that can expand risks and returns. In addition, futures support T+0 trading and can be bought and sold at any time.


The price of futures contracts currently traded will change in a few days or months, and when there is a price difference, profit margins can be seen. Futures trading is different from stock trading and is mainly manifested in the following aspects:


1. Futures can be traded in both directions

The A-share market can only trade in one direction, with investors buying stocks at low prices and selling them at high prices to earn a price difference. In addition to being long, futures can also be short. Buying futures at a low price can earn profits after the price rises. On the contrary, if you short futures and the futures price drops after a period of time, there will also be a price difference, which is profit. For ordinary investors, two-way trading undoubtedly increases investment difficulty.


2. Futures are traded using leverage

So-called leveraged trading refers to the trading authority of full futures in the futures market, where only a portion of the amount needs to be paid. Through the operating mechanism of margin, the risks and returns will increase several times. If the price is correctly predicted to rise or fall, higher returns can be obtained. On the contrary, if one misjudges the rise and fall, fans will also be huge.


3. High handling fees for futures trading

The handling fees of the three domestic futures exchanges are all around $2–$10,000. Although the rates may not seem high, there are other additional fees required. Due to the use of leveraged trading, the purchase amount is relatively large, resulting in high handling fees.


4. Futures trading using T+0

The so-called T+0 refers to the ability to buy and close positions at any time. The T+0 trading mechanism has both advantages and disadvantages. The advantage is that after obtaining profits, you can sell them at any time and put the profits in your pocket. The drawback is that it can cause frequent transactions and ultimately require high transaction fees.


Futures actually belong to contract trading. Futures can be traded in both directions, with high transaction fees and T+0 trading. They can be bought and sold at any time.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Microsoft's growth path and investment value

Microsoft's growth path and investment value

Microsoft's tech leadership, diverse ventures, and stable dividends offer strong investment potential and long-term growth prospects.

2024-05-17
A Guide to Calculating and Applying Sharpe Ratio

A Guide to Calculating and Applying Sharpe Ratio

The Sharpe ratio gauges risk-adjusted returns, aiding in the selection of strong investments based on higher returns per unit of risk.

2024-05-17
Non-ferrous metal overview and investment analysis

Non-ferrous metal overview and investment analysis

Non-ferrous metals perform well in economic expansion but can be volatile due to sentiment. Investors should monitor supply-demand and global trends.

2024-05-17