What are futures on a stock exchange?

A futures contract is a derivative financial instrument, an agreement between two parties to buy or sell securities in the future. The contract specifies the terms and prices at which the securities will be traded.

Most futures trades are speculation based on price forecasts. If prices are expected to rise, traders buy futures; if prices are predicted to fall, they sell them.

The Euro future forecast can go up and down, and it is to the trader’s advantage to buy at a low price and sell at a high one. The principle of buying and selling speculative instruments is the same as in trading other exchange-traded assets. 

When executing a speculative forecast, three variants are possible:

  • the commodity is worth more, and the buyer receives a profit;
  • The price has not changed. No one makes a profit or loss;
  • The commodity became cheaper, and the seller received a profit.

The exchange guarantees that the futures transaction will be executed. As collateral, participants deposit a sum of money, which is frozen in an account. This money is called a security deposit or collateral. For each futures, the exchange calculates the amount of security deposit separately.

Those who trade futures keep several times as much money in their accounts as they need for collateral. It is done to avoid mandatory closing of transactions at the market price, if on the client’s account there is not enough money for the security deposit.

Types of futures contracts: crude oil future prices and others

There are two types of futures contracts: deliverable and settlement.

Supply contracts

In a futures contract the seller sells and the buyer buys a quantity of the goods on a futures date (delivery date). The settlement is made at the price quoted on the last trade date. If on the delivery date the seller is unable to deliver the goods, the exchange imposes a fine.

Crude oil future prices: Settlement Prices

Unlike deliverable futures, cash futures do not provide for physical delivery of the underlying asset. A good example is crude oil futures prices. The settlement is made in money: one party pays, the other the difference between the asset price at contract conclusion and the price established on the closing date.

There are two main purposes of settlement contracts: speculation and hedging. In the second case, a transaction is concluded in one market to ignore the losses from the price change of the opposite position in the other market.

How to earn on day trading crude oil futures

  • There should be enough money on the balance to cover the security. When buying day trading crude oil futures, it is advisable to have enough money to be able to trade even if the investor is losing.
  • When trading futures, the exchange and the broker charge commissions, but their amount is several times less than when buying and selling stocks.
  • A futures contract is a suitable instrument for intraday trading.
  • A long position is when you buy on the increase in value, and a short position when you receive income on the decrease in price. The trader can choose any trading strategy.
  • The buyer of an asset has the right to sell it before the contract expires.

Please note: trading on crude oil futures prices is not suitable for beginners because it is closer to speculation than to investment. It is better to try to make money on the euro dollar exchange rate. 

What to Consider When Trading

To operate successfully on the futures market, the following should be considered:

  • Volatility. The higher it is, the more profit can be made in a short time and the higher the risks of trading. Volatility – is the price volatility.
  • Liquidity. When choosing exchange-traded instruments, one should look at the number of bids to sell and buy at different price levels. The higher the liquidity of an asset, the faster it can be sold.
  • Diversification. An investment portfolio must be constructed so that it contains various instruments. When trading in one asset yields losses, they are compensated with the profit from other instruments.

Important! Financial losses when trading are unavoidable. To minimize them, there should be restrictions on the price. Also, follow the news on Letizo news to stay informed. 

By Cary Grant

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