Trading the most common type of futures contract in the UK, can be a great way to make extra money. Let’s look at these contracts and how you can trade them.
What is a futures contract, and how does it work?
A futures contract is an agreement to buy or sell an asset at a future date at the agreed-upon price. The contract buyer agrees to purchase the asset, and the seller agrees to sell it at the specified price on the specified date. Futures contracts are used to hedge against price volatility or to bet on future price movements.
If a farmer expects the price of corn to increase in the future, they might purchase a corn futures contract. If the price of corn does indeed increase, they can then sell their contract at a profit. Similarly, if the price of corn falls, they can sell their contract at a loss.
Futures contracts are traded on commodities exchanges, and the assets underlying them can include anything from oil and gold to stocks and currencies.
The benefits of trading futures contracts
Futures contracts provide investors with several benefits. Firstly, they offer the opportunity to speculate on the future price movement of an asset.
Secondly, they provide hedging opportunities for those who seek to mitigate against price risk. For example, a wheat producer may choose to enter into a futures contract to lock in a selling price for their crop before it is harvested. It ensures that the producer will receive a fixed price for their wheat, regardless of any changes in the market price.
Finally, futures contracts can generate income through a process known as ‘rolling’. It involves closing out an existing contract and entering a new contract with different dates but similar prices. Investors can take advantage of slight price discrepancies between different futures contracts by doing so.
The most common type of futures contract in the UK
The three most common types of futures contracts in the UK are commodities, interest rates, and stock indexes.
Commodity futures are the most popular type of contract, with the most actively traded being oil, gold and natural gas. These contracts are typically traded on the London Metal Exchange and the Intercontinental Exchange.
Interest rate futures are used to hedge against changes in interest rates. The most common type of contract is the short-term ‘Eurodollar’ contract, which is based on US dollar LIBOR (London Inter-Bank Offered Rate).
Stock index futures are used to speculate on stock markets’ direction or hedge equity portfolios. The two most commonly traded indices in the UK are the FTSE 100 and the S&P 500. Futures contracts can be an essential tool for hedging or speculation, but it is crucial to understand how they work before entering into any trades.
How to trade a futures contract
To trade a futures contract, you will need to open an account with a broker that offers access to the exchange where the contract is traded.
You will also need to put down a margin, a deposit that serves as collateral for the contract. When the contract expires, you will either settle the contract by paying or receiving the difference between the specified price and the actual market price or roll over the contract into a new one.
Futures contracts can be complex financial instruments, so it is essential to do your research and understand the risks before trading.
Tips for beginners who are thinking about trading futures contracts
Here are a few tips for beginners who are thinking about trading futures:
Find a good broker- Your broker will be your biggest asset in this venture, so it’s crucial to find one that you can trust. Do some research and read reviews before making your selection. You can view this site for more information on futures.
Create a trading plan- Once you’ve educated yourself on futures trading basics, it’s time to start mapping out your strategy. Decide what types of contracts you want to trade, how much risk you’re willing to take on, and your exit strategy. It will help you stay focused and avoid making impulsive decisions when the markets move fast.
Start small- Don’t put all your eggs in one basket from the outset. Start with small trades and gradually increase your position size as you gain more experience.