Futures are a derivative instrument that derives its value from another financial asset like the bond, stock index or traditional stock. Futures are an ideal way through which a trader could manage and hedge risks. If you are interested to earn a profit by means of speculation, futures are the right choice for you. However, if you are a beginner to trading, you can take the help of different online platforms that help you take the right decision while trading. This Site is an example of a reputed online trading platform.
Future contracts have many advantages over stock trading because of the way it is traded and structured. Listed below are few of them.
Execution and commissions costs are low- The commission on the future trades are quite low and it would be charged only when the position gets closed. The total commission or brokerage is normally just 0.5% of the value of the contract. However, it also depends on the service level offered by the broker. The online trading commission will be bare minimum as compared to the full-service brokers.
Speculators could make quick money- Investors who are good in making the right judgment could easily make money trading futures as he is trading with much more exposure as compared to the normal stock market. Also, the price tends to move quickly in the futures market than in sport or cash markets. However, there is a chance of losing money. The loss could be minimized by opting for the stop-loss orders.
Future markets are fair and more efficient- In future markets, it is quite tough to trade using the inside information. For instance, no one can predict the weather or the next government action policy.
Futures are apt for hedging or diversification- Futures are a good way to manage or hedge different types of risks. Organizations that are engaged in foreign trade make use of futures to manage the interest rate and foreign exchange risk by locking in the rate if they anticipate a future drop in rates and are planning for a sizeable investment. Futures help in increasing the efficiency of the underlying market as they lower the future unforeseen costs of buying the assets outright. For instance, it is much more efficient and cheaper to go in a particular asset than to purchase every stock to replicate the index.
However, you need to have a thorough knowledge of the market, economy, government policies, etc to excel in the futures market.