The futures market is full of interesting tidbits of information to be found, and any successful trader has usually figured out a way to bring all of that information to the surface and use it to their advantage. Of course, there are some things that even the most well rounded trader hasn’t heard of or thought they needed to know. For 4 aspects of futures trading you should make yourself aware of, read on through the following article.
The Date Of Expiration
Yes, you heard it right, there is an expiration date on futures contracts, and this puts you in a position where you may need to make some important decisions in a short span of time. Dummies.com explains:
All futures contracts are time-based; they expire, which means that at some point in the future they will no longer exist.
If you’re looking at a looming deadline, you have a couple of options you can consider, but you’ll need to weigh them mentally and decide which one will best benefit your portfolio in the end. On the one hand, you could sell the contract, which could put you in a good position or a worse position depending on where it stands in the marketplace at the time. You could also rollover the contract, which would mean selling the contract only to buy the next available contract in the same niche. Both of these actions have their merits, so it may come down to profitability in the end.
If you’re a futures trader already then you must be aware that you’ve got to put forward a certain amount of money before you can even start trading on a contract. The margin varies from contract to contract and may even differ from region to region; making it important that you do your homework before you choose to buy your way into an investment. Some brokerage firms also require you to put some money down before you can trade. Rates change depending on your broker and what they expect to get out of these trades for you, but it can range anywhere from five thousand to two hundred thousand dollars or more.
Daily Limitation On Price
One of the benefits of futures trading is that there is a limitation on the price; to some this might be a negative association, but you keep in mind that the less you buy the less you’ll lose if the purchase goes south. Futuresknowledge.com advises:
The limits are stated in terms of the previous day’s closing price plus or minus so many cents or dollars per trading unit.
Basically this means that each day the market establishes a daily price per contract which is generally the closing price of the day before plus or minus dollars and cents for each unit. Once that limitation has been accounted for there can be no trading at a higher bid until the following day and only then if the market has raised the contract price for the day.
Don’t count on having those farm fresh eggs delivered to your house or business after your trade completes; most traders never see the commodities that they wager on. The Forward Markets Commission of India writes:
Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place.
The futures market isn’t so much about actually purchasing product, but about making a profit off of the availability of the contract and what its net worth has become over time; this takes skill, knowledge, and patience.