Futures trading can be used for any financial market, although the most common assets to trade through futures contracts belong within the commodities and indices. Futures trading can be used for hedging or speculation.
How to use this guide?
- Understand how futures trading works: Futures trading works by using CFDs to speculate on the price of an underlying futures market. CFDs can be used to go both long or short, meaning that you can trade in markets that are rising as well as falling
- Pick a futures market to trade: With various futures markets to choose from, you should establish which one is most suited to your individual trading style. Some experience higher volatility and could be better suited to short-term day traders, while lower volatility markets are often preferred by traders who have lower risk appetites.
- Create an account and log in: To start trading futures with CFDs today, open an account with CAPEX.com. Our spreads are among the lowest in the industry and we have a diverse futures offering, which includes the most popular indices, commodities, bonds, and cryptocurrencies on the market.
What is a Futures Contract?
A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price. That asset might be commodities, indices, cryptocurrencies, and a range of other assets. Typically, futures contracts trade on an exchange; one party agrees to buy a given quantity of securities or a commodity and take delivery on a certain date. The selling party to the contract agrees to provide it.
The futures market can be used by many kinds of financial players, including investors and speculators as well as companies that want to take physical delivery of the commodity or supply it, and includes a wide range of assets.
With us, you can speculate on whether the price of a futures contract will rise or fall with CFDs. Since these products are financial derivatives, you don’t have to take on the obligation to buy or sell and will not be taking ownership of the underlying asset. Instead, you will gain exposure to the underlying futures contract by speculating using CFDs. This means that your futures trades will be leveraged.
Leverage can magnify both your profits and losses as they’ll be based on the full exposure of the trade, not just the margin required to open it. This means losses, as well as profits, could far outweigh your margin, so always ensure you’re trading within your means.
Types of Futures Contracts
Commodities represent a big part of the futures-trading world, but it's not all about hogs, corn, and soybeans.
Commodity futures are agreements to buy or sell a pre-determined amount of a particular commodity at a specified price and date. For commodity futures contracts, the expiration month is included in the name of the contract.
The three main areas of commodities are agricultural (wheat, sugar, corn, coffee), energy (crude oil, gasoline, natural gas), and metals (gold, silver). Commodity prices are extremely volatile and can be affected by the wider geopolitical atmosphere, as well as the weather, which correlates with supply and demand. For example, if a country such as the US, which produces a vast number of soybeans, experiences a terrible drought, then they’ll need to source those soybeans from somewhere else, such as Brazil, likely at a much higher price.
Indices futures contracts are for speculating on the price movements of various stock indices, such as the Dow Jones (know also as US30), US Tech 100, and US 500, which are three of the most prestigious indices in the world. Like commodities futures, traders can choose whether to speculate on price movements or hedge with multiple positions in an attempt to reduce risk.
Indices futures are also available as ‘E-minis’, which are based on equities. E-minis are electronically traded futures contracts that represent a small percentage of the value of standard futures contracts. The expiration of indices futures contracts doesn’t require the delivery of a physical asset. Instead, it is settled with cash. The amount of cash is dependent on the difference between the entry and exit prices of the contract.
Learn how to trade stock indices with our online courses.
Bitcoin futures provide a popular, cost-effective way to fine-tune bitcoin exposure and to enhance your trading strategies.
Virtual currencies, including bitcoin, experience significant price volatility. Fluctuations in the underlying virtual currency's value between the time you place a trade for a virtual currency futures contract and the time you attempt to liquidate it will affect the value of your futures contract and the potential profit and losses related to it. Investors must be very cautious and monitor any cryptocurrency investment that they make.
Learn more about cryptocurrency trading and its benefits and risks.
Uses for Futures Contracts
Futures generally have two uses in investing: hedging (risk management) and speculation.
Hedging with futures
Hedging with futures enables you to control your exposure to risk in an underlying market. For example, if you own shares in companies on the USA30 and are concerned about their value dropping, you could short E-mini Dow ($5) Futures – the profits from which would hopefully offset a proportion of your share position losses.
If you had current short positions on the other hand, you could go long on an index future in case the market rises, with the idea that your long profits would offset your short losses.
Speculating with futures
A futures contract allows a trader to speculate on the direction of movement of an asset's price. If a trader bought a futures contract and the price of the commodity or index rose and was trading above the original contract price at expiration, then they would have a profit. Before expiration, the buy trade—the long position—would be offset or unwound with a sell trade for the same amount at the current price, effectively closing the long position.
The difference between the prices of the two contracts would be cash-settled in the investor's brokerage account, and no physical product will change hands. However, the trader could also lose if the commodity's price was lower than the purchase price specified in the futures contract.
Speculators can also take a short or sell speculative position if they predict the price of the underlying asset will fall. If the price does decline, the trader will take an offsetting position to close the contract. Again, the net difference would be settled at the expiration of the contract. An investor would realize a gain if the underlying asset's price was below the contract price and a loss if the current price was above the contract price.
You can trade futures on indices, commodities, bonds, and cryptocurrencies with us:
- Index futures: gain exposure to global stock indices including US30, US500, Nasda100, or volatility indices like VIX fear index
- Commodity futures: speculate on up to 20 hard and soft commodities including gold, silver, oil, or wheat.
- Bond futures: trade on the value of different bonds rising or falling, including German, UK, and US government bonds.
- Cryptocurrency futures: gain exposure to the hottest asset class without purchasing cryptocurrencies.
Futures contract trading example
With financial derivatives such as CFDs, you’ll be speculating on the price movements of a futures contract rather than buying and selling the contract itself.
Say it’s April and you think the price of oil is going to rise in the future – you could open a long CFD on a June oil future. Your profit is determined by how much the price of oil has risen by the future’s expiry, and the size of your position – less any charges. These will include your spread and any other costs or charges.
Alternatively, if you think that the price of oil is going to fall, you could go short with a CFD on the oil future. In this example, you’d profit based on how much the oil price fell and the size of your position (less the spread amount), and any fees incurred.
If your predictions are wrong and the oil market moves against you, you could suffer a loss.
In both scenarios, your position would be closed automatically in June – but you could close it before if you wanted. Below, you’ll see a graphic of the trading conditions tab in CAPEX’s trading platform. If you thought that the underlying market price was going to rise, you’d buy the market on your CFD trading account. If you thought that the underlying market price was going to fall, you’d sell.
The months for a futures contract will vary, and the example given here which uses June is for explanatory purposes. You should check the expiry of a futures contract before you open a position.
Why Trade Futures?
Individual investors and traders most commonly use futures as a way to speculate on the future price movement of the underlying asset. They seek to profit by expressing their opinion about where the market may be headed for a certain commodity, index, or financial product. Some investors also use futures as a hedge, typically to help offset future market moves in a particular commodity that might otherwise impact their portfolio or business.
Of course, stocks or ETFs can similarly be used to speculate on or hedge against future market moves. They all have their own risks you need to be aware of, but there are some distinct benefits the futures market can offer that the equities market does not.
Establishing an equity position in a margin account requires you to pay 50% or more of its full value. With futures, the required initial margin amount is typically set between 3-10% of the underlying contract value. That leverage gives you the potential to generate larger returns relative to the amount of money invested, but it also puts you at risk of losing more than your original investment.
Future contracts are traded in huge numbers every day and hence futures are very liquid. The constant presence of buyers and sellers in the future markets ensures market orders can be placed quickly. Also, this entails that the prices do not fluctuate drastically, especially for contracts that are near maturity. Thus, a large position may also be cleared out quite easily without any adverse impact on price.
In addition to being liquid, many futures markets trade beyond traditional market hours. Extended trading in stock index futures often runs overnight, with some futures markets trading 24/7.
Futures provide a few ways to diversify your investments in ways stocks and ETFs can’t. They can give you direct market exposure to underlying commodity assets vs. secondary market products like stocks. Additionally, they allow you to access specific assets that aren’t typically found in other markets. Futures might also be used if you are looking for strategies designed to help manage some risk surrounding upcoming events that could move the markets.
With futures, the margin requirement is the same for long and short positions, enabling a bearish stance or position reversal without additional margin requirements.
When trading futures with CFDs, you’d go long if you believed that the underlying market price will rise, and you’d go short if you believed it will fall.
With CFDs, your profit or loss is determined by the accuracy of your prediction, and the overall size of the market movement.
The Risks of Futures Trading
Many speculators borrow a substantial amount of money to play the futures market because it’s the main way to magnify relatively small price movements to potentially create profits that justify the time and effort. But borrowing money also increases risk: If markets move against you, and do so more dramatically than you expect, you could lose more than you invested.
Leverage and margin rules are a lot more liberal in the futures and commodities world than they are for the securities trading world. An online broker may allow you to leverage 10:1 or even 20:1, depending on the contract.
The greater the leverage, the greater the gains, but the greater the potential loss, as well: A 2.5 percent change in prices can cause an investor leveraged 20:1 to gain or lose 50 percent of her investment. This volatility means that speculators need the discipline to avoid overexposing themselves to any undue risk when trading futures.
Futures trading platform
Our online trading platform, WebTrader, allows you to trade futures with CFDs. You’ll be speculating on the underlying market price, without entering the futures contract yourself, on a wide range of financial markets and assets.
View our offer on the platform after registering for an account to browse a full list of products that we offer.
When you trade with CFDs at CAPEX.com, you’ll find that the spreads are tighter and there is no commission for opening and closing trades, but you’ll incur rollover charges for positions maintained overnight.
Frequently Asked Questions
What Are Futures Contracts?
Futures contracts are an investment vehicle that allows the buyer to bet on the future price of a commodity or other security. There are many types of futures contracts available, on assets such as oil, stock market indices, currencies, and agricultural products.
Unlike forward contracts, which are customized between the parties involved, futures contracts trade on organized exchanges. Futures contracts are popular among traders, who aim to profit on price swings, as well as commercial customers who wish to hedge their risks.
What is the definition of futures in trading?
Futures in trading refers to a futures contract – an agreement between two parties to trade an underlying market at a predetermined price on a specific date in the future. With CAPEX, rather than entering into a futures contract directly, you can speculate on the price of futures rising or falling with CFDs.
How are futures priced?
Futures are priced according to the spot value of their underlying market, plus any spread or commission that you pay a broker for executing your trade. The forces of supply and demand also play a role in determining how the price of a futures contract will move, with higher demand and lower supply causing prices to rise, while lower demand and higher supply will cause prices to fall.
How does margin work in futures trading?
Margin in futures trading enables you to put down a small deposit to open a CFD trade, while receiving much larger market exposure. However, you should remember that when trading with margin, your end profit or loss is determined by the full size of the position, and not just the margin required to open it.
Are Futures a Type of Derivative?
Yes, futures contracts are a type of derivative product. They are derivatives because their value is based on the value of an underlying asset, such as oil in the case of crude oil futures. Like many derivatives, futures are a leveraged financial instrument, offering the potential for outsize gains or losses. As such, they are generally considered to be an advanced trading instrument and are mostly traded only by experienced investors and institutions.
What Happens if You Hold a Futures Contract Until Expiration?
Oftentimes, traders who hold futures contracts until expiration will settle their position in cash. In other words, the trader will simply pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period.
In some cases, however, futures contracts will require physical delivery. In this scenario, the investor holding the contract upon expiration would be responsible for storing the goods and would need to cover costs for material handling, physical storage, and insurance.
What are the differences between futures and options?
Futures contracts are different to options contracts because they obligate both parties to exchange the underlying for the agreed-upon price at expiry. An options contract on the other hand, only obligates one party to buy or sell if the other party exercises their side of the agreement. They would only do this if they feel the market has moved in their favour.
What is the difference between futures prices and spot prices?
The spot price is the current underlying market price that you would be able to trade at if you opened a position today. The futures price is the price that you lock in when trading a futures contract, and it is what you will be able to buy or sell an underlying market for at or before the contract’s expiry date.