What Is Futures Trading in Stock Market?

What Is Futures Trading in Stock Market?

To answer the question, ‘What is futures trading in stock market’, let’s have a look at the definition of futures first. Futures are derivative securities, contracts to buy or sell an underlying asset (stock, commodity, currency pair, stock index, etc.) on a given date in the future but at the current market price. Depending on the selected asset, futures can be deliverable (delivery of a physical asset/commodity at a predetermined price) and settlement (recalculating the difference in prices of non-physical assets – stocks, indices, etc.). Futures trading is carried out on the exchange at a time set by the broker. It is a high-risk business, by minimizing which you can get high returns.

How Futures Trading Works

It is noteworthy that by purchasing futures on certain assets, traders do not become their owners, i.e., cannot receive dividends or participate in shareholders’ meetings. Thus, you can delve into the question of what is futures trading in the stock market without understanding the features of certain trading products. Profit from futures trading depends on the chosen strategy:

  • Risk hedging helps to minimize potential losses and benefit from fixing the current price of the selected asset. It is usually a long-term position.
  • The speculation involves the resale of the futures at a higher price and profit from high liquidity and large financial leverage.
  • Arbitrage operations are based on interaction with spreads – the difference between ask and bid prices at the same time. It is usually a short-term position.

What Is Currency Futures Trading Peculiarity and Where to Start?

Trading futures requires specific skills and knowledge, as well as experience with trading platforms. Suppose you decide to use this financial product. In that case, we recommend that you start by studying what currency futures trading is – this is the most accessible and understandable business for beginners, which many professional brokers offer. Also, it will help you better understand the principles of working with futures in general and learn the fundamental strategies.

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