A  future contract is a kind of financial contract in which the two involved parties agree on the transaction of physical commodities, or financial instrument, at a particular cost for delivery in future. When you invest in a future contract, you are agreeing to buy a commodity that the seller has not yet manufactured, or established a price basis for. But this doesn’t mean you will be selling and buying large physical commodities and inventories. Traders in futures market are mostly involved in hedging risks, instead of actual exchange of commodities.

DIY Future Trading

Future trading is not suitable for everyone as promising as the profits may sound. Before taking a decision about future trading, make sure you have a strong knowledge on how the market functions and contracts work. You will have to invest a great deal of time to research.

It is possible to begin the trade as an individual investor without the assistance of a broker. It is very risky because you will have to manage all trading by yourself. Whether its managing funds, maintaining margins, ordering trades, acquiring research or analyzing the market movement, you will have to take the sole responsibility. It requires immense dedication.

Trading Through a Managed Account

Another way to be a participant in future trading is by opening a managed account. Managed accounts work very much like equity accounts. Based on certain pre-decided conditions, the broker will have control on operation of your account. This is less risky, considering you are entrusting the task to a well-trained professional. However, you will have to incur any loss that occurs and will have to pay extra fee towards management of the account.

Trading Through a Commodity Pool

The third option that bears least of the risks is to join a commodity pool. It is similar to a mutual fund, where you can invest on a pool of commodities. The funds are combined and trading is done as if from a single account. Loss and profit depends on the amount you have invested in. This method gives an opportunity to invest in diverse types of commodities. In addition, you will not be subjected to margin calls. However, make sure you invest in a pool that is managed by an experienced broker because it still has all the risks involved in future contracts trading.

It is important to note that the future market is extremely risky, liquid and complex in nature. It is important to break down the complex issues into simple concepts and understand it completely before deciding to plunge into the future market. Whether you have planned to trade as an independent trader, or with the help of a broker, make sure you seek proper guidance before taking the big leap. 

blog comments powered by Disqus