If you’re interested in trading in stock futures, there are several things to know before getting into heavy trading. From the benefits and drawbacks to the way traders calculate risk and speculate on commodities, futures trading can offer a lucrative income stream when done right. Here’s what to know when betting on stock futures.
What Are Stock Futures?
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Stock futures or futures contracts are financial transactions between a buyer and a seller that set a specific price for the commodity for a predetermined date in the future. This predetermined date is the expiration date, and on this date, the seller is obligated to sell the stock and the buyer is obligated to make the purchase of the asset. Futures contracts enable traders to buy stocks at lower prices and sell them at higher prices.
Benefits to Trading in Stock Futures
One of the benefits of trading stock futures is that they are highly liquid. In other words, you don’t have any limits to how many stock futures you can make within a day, and you can make futures contracts at high rates. In fact, day traders frequently use futures contracts to liquidate quickly and create profit gains.
Another great advantage of trading in stock futures is that of leverage. Futures contracts enable traders to gain leverage by only needing to provide the initial margin of the stock’s purchase price. The margin may vary between 3% to 12% of the commodity’s value, but this means that traders can potentially expose themselves to assets with much higher values than the margins they provide at the time of purchase.
Stock futures are also a great way to diversify your investments. Unlike the volatility of different stocks, bonds, and mutual funds, futures contracts enable you to lock in a specified price that these assets will sell for in the future, no matter how the market moves.
Drawbacks to Trading in Stock Futures
One of the drawbacks of stock futures trading is related to the high leverage of futures contracts. Even though the high leverage can offer higher gains, it can also mean drastic fluctuations in the stock’s future value. Since futures contracts are set to expire on a specific date, as this date gets closer, the specified prices for the commodity can appear less attractive to investors. This can be because of more profitable investments or another reason, but this can sometimes lead a futures contract to expire with little to no value.
How to Get Started Trading in the Futures Market
Ultimately, it is fairly easy to get started trading stock futures. For one, you can get started through an online trading platform where you can find full-service brokers and discount brokers who can analyze, research, buy, and sell futures on your behalf. If you’re ready to get started with stock futures trading, look for platforms that provide learning resources and research tools. You can even use trading simulators to help you practice trading before getting into the actual markets.
As you learn more about futures trading through resources, tools, and experience, you’ll have what you need to truly make futures trading a viable way to make investments.