In the fast-paced world of finance, where opportunities for lucrative investments abound, futures trading has emerged as a captivating avenue for both seasoned investors and those just dipping their toes into the market. With its potential for high returns and unique dynamics, futures investing offers a thrilling ride that can be financially rewarding and intellectually stimulating.
But what exactly are futures, and how can you tap into this intriguing market? To ensure you are fully informed, we take you through the futures trading basics. Not only will you be well-versed in the futures market, but you will also understand the benefits and drawbacks of this investment strategy. Ultimately, this guide will provide you with the essential tools to confidently navigate the world of futures trading.
In This Guide
How to Invest in Futures: Basics and Pros & Cons
Futures Trading: Basics and History
Futures trading is a financial practice that involves buying or selling contracts known as futures contracts. These contracts obligate the buyer to purchase a specific quantity of a particular financial asset, including commodities, currencies, or financial instruments, at a predetermined price and date in the future. This form of trading serves as a means for investors to speculate on the future price movements of various assets, allowing them to profit from rising and falling markets.
The roots of futures trading can be traced back centuries, with its origins deeply rooted in agricultural practices. Back then, farmers and merchants sought a way to hedge against the price fluctuations of crops, and thus, the concept of futures contracts was born.
Over time, futures trading evolved beyond the agricultural sector and expanded to encompass numerous assets, including metals, energy, currencies, and stock market indices. Today, futures trading is globally recognised and regulated, providing individuals and institutions with excellent investment and risk management opportunities.
What are the Advantages of Future Trading?
Futures trading offers many advantages for investors seeking to diversify their portfolios and capitalise on market opportunities. As a trader, becoming familiar with the benefits of futures trading can help you make informed decisions that could bring about good returns. We list below some of the advantages of futures trading and shed light on why it has become an enticing option for investors worldwide.
- Potential for High Leverage: Futures trading allows you to control a substantial amount of an underlying asset with a relatively small investment. Also known as leverage, you get to trade futures with funds more than your initial capital. As a result, you can magnify profits should the trade work in your favour. However, note that applying leverage in any trade is highly risky, so you must approach it cautiously. We would recommend to read about the best UK high-leverage brokers in our other guide.
- Diverse Range of Tradable Assets: The online futures market hosts numerous tradable instruments, including commodities (such as oil, gold, and wheat), currencies, interest rates, stock market indices, and more. This diversity allows investors to explore different asset classes and diversify their portfolios.
- Potential for Profit in Bull and Bear Markets: Unlike buying and selling physical assets, futures trading allows investors to profit from the rising and falling markets. This flexibility enables traders to adapt to changing market conditions and seize profit opportunities in various market scenarios.
- Liquidity and Price Transparency: Futures markets are known for their high liquidity, meaning there is a constant flow of buyers and sellers. With liquidity, it’s easier for you to enter and exit positions swiftly, reducing the risk of being stuck with illiquid assets. Additionally, futures markets are highly transparent, allowing you to make informed decisions based on real-time market information.
- Risk Management and Hedging: Futures trading provides an effective tool for managing risk and hedging against adverse price movements. Market participants, including producers, consumers, and speculators, can utilise futures contracts to offset potential losses or stabilise prices. For example, farmers can use futures contracts to lock in a predetermined price for their crops, protecting against price fluctuations. Similarly, investors holding a portfolio of stocks can use futures contracts to hedge against potential market downturns, mitigating their risk exposure.
What are the Disadvantages?
Like any other trading method, futures contracts have their pitfalls to note. Here are the disadvantages of trading futures.
- Predicting Future Events is Challenging: While futures contracts can be profitable, the volatility that comes with it makes it challenging to predict or control future events. For instance, natural disasters, political events, changes in weather conditions, etc., may interfere with your predictions, thus leaving you with losses.
- Margin Requirements: Trading futures involves the use of margin, meaning traders only need to deposit a fraction of the contract’s total value to enter a trade. While margin can amplify profits, it also magnifies losses. If the market moves against a trader’s position, they may be required to deposit additional funds to meet margin calls, potentially leading to significant financial strain.
- Expiration dates: Futures contracts have expiration dates, and sometimes the assets you invest in lose value as the expiration dates approach. As a result, your contract may expire worthless, leaving you with losses. Therefore, always conduct thorough research on an asset in a futures contract to maximise your profitability.
How to Choose the Right Platform to Trade Futures
When considering futures and options trading, it’s imperative to understand that these markets are inherently highly leveraged and speculative. To navigate them successfully and mitigate risks, it’s crucial to familiarise yourself with the intricate contract terms and the potential for margin calls that could affect your positions.
These financial instruments demand a deep understanding of derivatives trading, and therefore, it’s advisable to engage in futures and options only if you possess the requisite knowledge and expertise. Prudent and informed participation in these markets is essential to safeguard your investments and capitalise on their potential benefits.
Choosing the right platform to trade futures is crucial for traders looking to engage in this dynamic and potentially rewarding investment activity. With numerous platforms available in the market, each offering different features, trading tools, and services, finding the most suitable option can be overwhelming. However, by considering specific factors as listed below, you can identify a platform that aligns with your trading goals, preferences, and risk tolerance.
Ensure that the futures trading platform you choose is regulated by a reputable financial authority. Regulatory oversight provides an additional layer of security and ensures the platform adheres to industry standards and best practices. Not only will you avoid falling victim to scammers, but you will also easily take legal action against your broker in case of any contract breach. For instance, if you are a UK trader, settle with a futures broker overseen by the Financial Conduct Authority (FCA).
Evaluate the trading tools and features offered by different futures trading platforms. Look for platforms that provide adequate market research and analysis tools. A user-friendly interface, customisable layout, and robust execution speed are also essential considerations for an optimal trading experience. Most importantly, choose a platform with adequate learning resources and a demo account to ensure you get started on a good note.
Consider the range of futures markets available on the platform. Different platforms may offer varying market coverage, including equity index futures, commodity futures, currency futures, or interest rate futures. Ensure that the platform provides access to the markets you are interested in trading, as well as the specific contracts and expiry dates you wish to trade.
Evaluate the platform’s fee structure, including commission rates, account maintenance fees, transaction costs, and more. Compare the cost of trading across multiple platforms to ensure you get competitive pricing that aligns with your trading frequency and budget.
Consider the quality and availability of customer support provided by the platform. A reliable platform should offer responsive customer service through various channels like phone, email, or live chat. Prompt and helpful support can be crucial in addressing technical issues, resolving concerns, and receiving timely assistance when needed.
How to Trade Futures
Trading futures may appear complex, but understanding the fundamental steps involved can help you easily get started. Here are the step-by-step procedures on how to buy futures contracts.
Before diving into futures trading, educating yourself about the basics is essential. Familiarise yourself with key concepts such as futures contracts, margin requirements, leverage, and settlement procedures. Understand how futures prices are determined and how market factors can influence them. Numerous educational resources are available on online brokers’ platforms, including books, online courses, and tutorials, to help you gain the necessary knowledge.
Selecting a reputable brokerage firm is crucial for futures trading. Look for a firm that offers access to the futures markets you are interested in and provides a user-friendly trading platform with essential features and tools. Consider factors such as commission rates, margin requirements, customer support, reputation, and more, as listed above.
Once you have chosen a broker based on your futures trading requirements, you’ll need to open a trading account. This typically involves completing an application using your personal details such as name, email, phone number, and more. You must also verify your details using copies of your original ID card and utility bill to get your account opening procedure approved. Remember, most futures trading brokers have trading apps you should install on your mobile device to trade on the move.
Your account needs to be fully activated to fund it per a broker’s minimum deposit requirement. Fortunately, most UK futures brokers allow you to make deposits and withdrawals using multiple methods, including credit/debit cards, e-wallets, or bank transfers.
Before executing any trades, it’s crucial to develop a comprehensive trading plan. Define your trading goals, risk tolerance, and preferred future trading strategies. Determine the markets and instruments you will focus on and establish clear entry and exit criteria for your trades. A well-defined trading plan helps you stay disciplined and make informed decisions based on predetermined rules.
Once you have identified a trading opportunity based on your analysis, it’s time to execute your trade. Select the appropriate futures contract on your trading platform, specify the quantity you wish to trade and choose an order type. Keep in mind that futures trading involves leverage, so understand the margin requirements and the potential impact on your trading account.
As a futures contract trader, you must closely monitor your trades’ progress to ensure everything works out as expected. You should also analyse trades’ outcomes to identify patterns and areas for improvement. Keep a trading journal to record your activities, rationale, and emotions during the trade. Remember, learning from your experiences and making necessary adjustments to your trading plan can help refine your skills and improve your trading performance over time.
Futures Markets to Trade
Futures markets offer UK traders numerous opportunities to engage in various trading activities. We explore below some of the most popular futures markets available to UK readers, highlighting their key features and potential benefits.
- Equity Index Futures
This type of futures allows traders to speculate on the performance of stock market indices. For UK traders, contracts based on best indices to trade like the FTSE 100, FTSE 250, or even global indices like the S&P 500 and NASDAQ can provide exposure to equity markets. These futures contracts enable traders to profit from rising and falling markets and can serve as a tool for diversification or hedging strategies.
- Commodity Futures
Trading commodity futures allows you to participate in the price movements of various commodities. Popular commodities in futures trading include gold, oil, agricultural products, and more. Additionally, you can also choose to invest in natural gas futures or invest in lithium, taking advantage of their potential price fluctuations. Commodity futures provide opportunities to capitalise on supply and demand dynamics, geopolitical events, and market trends. You can take advantage of these markets to diversify your portfolios or speculate on price fluctuations in specific commodities.
- Currency Futures
There are also currency futures that enable traders to speculate on the exchange rate between currency pairs. Popular currency futures contracts include GBP/USD, EUR/GBP, and EUR/USD. Trading currency futures provides exposure to the foreign exchange market, allowing traders to profit from changes in exchange rates. These contracts are helpful for both speculative trading and hedging currency risk in international transactions.
- Interest Rate Futures
This online futures market involves contracts based on interest rates, such as government bonds or short-term interest rates. Traders can take positions based on their expectations of interest rate movements or use these contracts to hedge against interest rate risks. You can trade interest rate futures to profit from changes in the monetary policy outlook or manage interest rate exposure in your investment portfolios.
FAQs
You can trade futures contracts on a credible futures broker regulated in your region. For instance, UK traders need FCA-regulated futures brokers to trade securely. There are numerous options to choose from, so follow the tips in our guide above to identify the best.
To trade gold futures, you first need to understand the dynamics around the commodity, including what influences its price and the market in general. With your already established trading account, choose your contract size and open a position. Remember, always track your activities and apply risk management controls to mitigate massive losses when they occur.
The best way to start trading futures is by understanding the market you want to trade. Then, find the best futures broker suitable for your needs. It is also crucial to conduct thorough market research and analysis to develop the best strategy to maximise your profit potential.
Absolutely. Many futures brokers allow traders to get started with as little as £100. All you have to do is identify one of such brokers and confirm their fees or charges to ensure they fit your budget.
Conclusion
Futures trading continues to skyrocket in the UK, and we hope our “How to invest in futures” guide has equipped you with the necessary information to get started. Although the activity is risky and can leave you with losses, you can still profit from it. All you have to do is be familiar with the futures market you trade and conduct thorough market research before opening a position. Plus, only trade with a reputable and reliable futures broker and be open to learning from your mistakes in case of a loss. Remember, even the most professional futures traders have their bad days. Therefore, remain patient and dedicated to your activities for positive results in the long run.
25,000 hours of testing 70+ brokers. Our recommended broker is Plus500.
Our recommended broker is Plus500.