FAQs/span>
- What are futures?
- What are futures used for?
- Are all futures contracts deliverable?
- How do I sell something I don't own?
- Do I have to watch the markets constantly if I trade?
- How do margins work?
- What does going long or short mean?
- What is hedging?
- What is speculating?
What are futures?
When you invest in futures, you agree to:
- buy or sell a commodity or financial instrument
- at a fixed time in the future
- at a price agreed on today.
Future contracts are legally binding. The delivery period, quantity and quality of the contract is standard. The price is set when the contract is entered into, and is negotiated between buyers and sellers through an exchange.
Futures contracts can be based on:
- commodities like gold, oil and coffee
- financial instruments like treasury bonds, stock market indices or shares.
Futures are highly leveraged because they give you a large exposure to an asset for a small outlay.
What are futures used for?
Most people use futures to:
- manage the risk of price fluctuations
- speculate or trade.
Futures transfer risk from people exposed to risk to those who want to benefit from the risk.
Are all futures contracts deliverable?
No, there are two types of futures contracts:
- deliverable contracts, where physical delivery of the asset takes place
- contracts that are settled in cash.
How do I sell something I don't own?
You don?t need to own the underlying commodity or financial instrument when you enter into a futures contract. The contract simply represents a commitment to either sell or buy the asset on the set expiry date.
Do I have to watch the markets constantly if I trade?
Not necessarily, if you use stop-loss orders and manage your money prudently, you may not always need to watch the markets.
How do margins work?
When you place a trade, you pay an initial margin of the underlying value of the contract. However, the margin required may vary according to the volatility of the market Clearing House and a further payment (or refund) may be required. The margin is later refunded when the futures position is closed (provided there are no outstanding payments).
What does going long or short mean?
Going long means buying a futures contract. Going short means selling a futures contract.
What is hedging?
Hedging is the execution of a transaction or series of transactions used to reduce the risk of potential losses from your current holdings. Hedging may be useful for someone who:
- has an exposure to price movements in physical or financial commodities
- wants to reduce the risk associated with this exposure
- aims to set a price level in advance for an asset they later intend to buy or sell
- will give up the opportunity to benefit from favourable price movements to protect against unfavourable price movements.
What is speculating?
Speculators:
- willingly accept the risks of price movements which hedgers attempt to avoid
- take a position based on their expectations about whether prices will rise or fall in the future in the hope of profiting from the change in price
- have no intention to buy or sell the asset, or to have long term exposure to the asset.