What Are Future Contracts
Future contracts are basically one of the best ways for you to trade commodities and it is only suitable for those who are willing to take risk as this is one of the riskiest ways of owning a commodity. This kind of commodities purchasing is highly recommended only for advanced investors and traders. Future contracts refer to the agreement which has set a specific time in the future to make or take delivery at an agreed price. Let’s take a standard contract for oil which is around 1200 barrels. You may enter a contract to purchase 1200 barrel at a cost of $50 per barrel which will be worth $60 000. If the price later increase to $55 per barrel then you are going to make a profit of $5 per barrel You could send it to gain profit.
Risks of Future Contracts
As what has been mentioned before, the future contracts are very risky and it is not recommended for those who just starting to learn to trade without extensive research. It involves buying something known as margin which means that you only need to pay just a small portion out of the value of the contract. Then, how about the rest of the value of the contract? The rest being borrowed. Based on the previous example, you would need to pay only around 25% of the total value of the contract. You are going to make a profit from this when you sell the oil. How much profit you make, let’s say 50%, is also going to be how much you could lose. The lose is only if the price is going down. However, for some cases, you may require to put up more than 25% of initial payment. This is all depend on your broker and how the investment is made. Besides that, futures also have a higher rate of commissions. Due to this fact, you are required to have a well-developed strategy and knowledge so that you can make your trade well.
Purchasing Futures Contracts
By having knowledge and information, you can use futures as a trade for commodity that you are interested in. The first thing is to find a broker that offers futures trading and then you can proceed with your plan. Generally, brokers that offer ETFs and mutual funds will have this option of futures trading available. Ask them about it and if they really offer it you can follow these steps:
- Select the type of commodity that you wish to purchase. Next, set the month that you wish for the contract to expire as well as the number of contracts that you are going to purchase.
- For example, you want to buy a contract dated 17 August 2017 crude oil contract. The available price is $45 per barrel. You can see that most brokers will have drop-down menus that offer a variety of dates, amounts and what types of commodities that are available. So, what you should do now? Just simply select the options that you prefer and then just click buy.