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Finance 101: Futures Trading Basics

August 19, 2019 by Daniels Trading| Futures 101

In this post, we’ll cover the essential tenets of the futures markets by examining two fundamental questions: “What are futures?” and “Why trade futures?” If you’re just starting to learn about futures trading basics, don’t worry ― the answers to these questions will help get you up to speed.

What Are Futures?

A futures contract is an agreement to buy or sell a certain quantity of an asset, on a forthcoming date, at a specified price. Often referred to simply as futures, the contracts themselves are legally binding financial instruments that represent an obligation to both the buyer and seller.

Here are three key characteristics of a futures contract:

  • Derivatives product: Futures are considered to be financial derivatives products. This means that their value depends upon that of an underlying asset or group of assets. Popular contracts are based upon the commodity, currency, equity, and debt asset classes.
  • Standardized: A futures contract is a standardized instrument. Being standardized ensures that each contract meets a predefined set of specifications, making it able to be readily traded on an exchange. Size, symbol, and pricing are a few examples of standard specifications.
  • Perishable: Due to the fact that they are subject to expiry, futures are perishable in nature. Each has an assigned expiration date; upon it passing, the contract becomes null-and-void, virtually worthless.

In short, a futures contract is a derivative product that may be traded on an exchange until it expires. Understanding these three futures trading basics is imperative for anyone interested in becoming an active participant in the marketplace.

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Why Trade Futures?

Featuring a vast array of products and markets, futures offer individuals from all walks of life a unique collection of opportunities. However, no matter your goals and objectives, there are two classifications of futures trading activities:

  • Hedging: Hedging is the limiting of risk through the use of various investment vehicles. Futures are popular hedge mechanisms due to their wide scope of offerings and inherent flexibility. Commodity producers and fund managers are two examples of parties regularly involved in hedging with futures.
  • Speculation: Attempting to profit from regular or sudden fluctuations in asset pricing is referred to as speculation. Buying and selling futures on short time frames is typically considered speculation because the goal is to make money directly from the act.

The beauty of futures is that they’re exceedingly receptive to both hedging and speculative enterprise. This is due in large part to the benefits of these futures trading basics:

  • Liquidity: Futures are based on a collection of the world’s most popular assets, such as crude oil and gold. A high degree of public interest dictates that many products regularly exhibit robust participation and strong market depth. This is important because having an abundance of active buyers and sellers promotes efficiency in the process of price discovery.
  • Volatility: Frequent and extensive fluctuations in futures pricing provides consistent trading opportunities. While volatility levels fluctuate from contract to contract, there is almost always a product on the move.
  • Flexibility: The futures markets offer participants unparalleled flexibility. A participant can benefit from being either long or short a market, while enjoying the enhanced purchasing power available courtesy of margin trading.

In addition to being liquid, volatile, and flexible, futures are attractive due to their affordability. When compared to other financial assets, the cost of trade is minimal and availability of margin is extensive. Ultimately, trading may commence with a moderate amount of risk capital, at a reduced cost structure. When coupled with the other futures trading basics, legions of traders and investors frequently choose futures over other financial products.

Know the Futures Trading Basics Before Jumping into the Markets

For almost any endeavor, it pays to be “in the know” before jumping in with both feet. To learn more about all things futures, check out the comprehensive online educational suite at Daniels Trading. Featuring exchange-direct tutorials, webinars, and trading guides, it can quickly answer any questions you may have regarding futures.

Daniels Trading Market Spotlight

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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