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What is meaning of futures trading?
Future trading involves obligation which makes it mandatory for the buyer and seller to abide by the agreement and complete the trade on a predetermined date and price. The predetermined time in futures trading is called delivery date and the fixed price is called futures price. To become more familiar with futures meaning you need to understand the following points –
The value of future contracts is influenced by the value of the underlying asset. If the value of underlying assets rises it increases the value of future contracts too.
Future contracts can be transferred and can be traded. If the seller wants to move out of the contract the seller can transfer the ownership to some other party. This applies to the buyer as well.
Future contracts involve obligation from both the parties hence these contracts must be properly regulated to avoid chances of default. In India, SEBI looks after the futures trading to ensure smooth functioning.
Future contracts follow a standardized procedure and cannot be customized by any individual and the conditions cannot be negotiated.
The settlements in futures trading are done through cash. The differences in cash values are paid by one party to another.
Unlike other investments, your skills are your own assets, and cannot be booked for taxes, for example, or stolen from you.
Now that you know what is future trading let us understand how to trade in the futures contract. Futures trading is done basis the price movements rather than buying or selling a stock. Primarily the two types of participants involved in futures trading are the Hedgers and Speculators.
Speculators take risks while futures trading and make profits from the price fluctuations.
Hedgers try to avoid risk, to protect themselves against price fluctuations. You can either do future trading on your own or manage your account with the help of professionals also called commodity trading advisors. You can select a broker and start learning about the trading platform. You can develop trading strategies and have a proper plan before trading. Following are a few strategies you can use:
How to Trade a Futures Contract?
Now that you know what is future trading let us understand how to trade in the futures contract. Futures trading is done basis the price movements rather than buying or selling a stock. Primarily the two types of participants involved in futures trading are the Hedgers and Speculators.
Speculators take risks while futures trading and make profits from the price fluctuations. Hedgers try to avoid risk, to protect themselves against price fluctuations. You can either do future trading on your own or manage your account with the help of professionals also called commodity trading advisors. You can select a broker and start learning about the trading platform. You can develop trading strategies and have a proper plan before trading. Following are a few strategies you can use:
Long Call
The buyer buys trade at the earlier decided price on a future date
Short Call
When the seller sells the trade at the predetermined price on a future date
Short Put
In this strategy, the seller is obliged to sell however the buyer can exercise the option contract. The buyer usually practices this when the value of the stock has gone higher than the predetermined price.
Long Put
The buyer can buy the trade at a predetermined price and the seller must agree to that price.
Bull Put Spread
When a party sells and buys two contracts and the predetermined price of one of the contracts is higher than the other.
Bear Call Spread
Similar to the above two option contracts are involved in this strategy. The strike price of the contract bought should be higher than the strike price of the contract sold.
Advantages Of Futures Trading
- Being able to profit not only when the price is high, but also when the price is low
- Unlike options, futures contracts do not suffer from time decay, meaning their value doesn't erode over time.
- Depending on the present future price, it helps to determine the future demand and supply of the shares
- Control large positions with relatively small capital, amplifying potential profits.
Disadvantages Of Futures Trading
- You need to understand futures trading thoroughly. You must learn about how to trading on both sides of buying and selling works
- Futures trading involves complex instruments and strategies, posing challenges for novice traders.
- Futures contracts are standardized, which means they may not perfectly match the specific needs of all traders.