The conclusion of futures contracts is far from new, but every year an instrument that is more and more actively used in the stock market. Novice traders and investors often turn their attention to futures, realizing how promising this instrument is. The successful implementation of trade requires an understanding of its principles and specifics.
- Futures as an instrument of exchange trading
- Difference between futures and stocks
- Types of contracts
- How it works?
- Where to work with futures?
- Registration and trading conditions on FORTS
- Gaining access to the CME exchange
- Advantages and disadvantages
- What you need to know about futures specification?
- Futures Trading Strategies
- What is the danger for beginners?
- How not to be mistaken when choosing a broker?
- Where can I find the history of quotes?
- Where can I find a complete list of futures?
- What happens on the last day of trading?
- Do investors need futures?
- What are the features of choosing futures by date?
Futures as an instrument of exchange trading
Futures is a contract that is an agreement to buy or sell an asset on a specified date at a predetermined price. Underlying assets are bonds, currencies, interest rates, and even the inflation rate on the Moscow Exchange market. The simplest example of entering into a futures contract:
- The farmer grows and sells beans. This year it costs one hundred conditional rubles, but there are forecasts that the summer will be grateful, which means the harvest will be plentiful. This means that in the fall, the supply will begin to exceed the demand for beans. Prices will drop.
- The farmer doesn’t want to sell beans for less. He finds buyers in advance who believe that the harvest will be poor and prices will rise accordingly.
- They agree among themselves that in six months the farmer will supply the buyer with beans for one hundred conventional rubles per ton.
In this example, the farmer plays the role of the seller of the futures – he fixes the price and a certain date when the goods will be delivered to the buyer. This is the point of futures trading. Trading is carried out on the stock market.
Difference between futures and stocks
The fundamental difference between these two instruments is in the traded objects. It is this difference that gives rise to frugality. The trader does not invest all the funds, but only a fixed amount – guarantees. This usually amounts to 12-13% of the value of the asset itself. The difference between futures and stocks is also easy to understand with an illustrative example:
- Angelina studied the most liquid (those that can be quickly sold at close to the market price) futures on the Moscow Exchange and decided to buy either 100 shares or 100 futures on Gazprom shares. The current share price is 228 rubles.
- To make a purchase, Angelina will have to spend:
- for 100 shares – 228 x 100 = 22,800 rubles;
- for 100 futures – 228 x 100 x 12% = 2736 rubles.
- The amount for futures is much less. The purchase is carried out not of the asset itself, but of a dispute over a change in its price.
There are other differences as well. Particularly highlighted:
- Validity. It is limited for futures. That is, having bought a 4-month futures contract, the obligations specified in the contract must be fulfilled in 4 months. Shares are not prohibited from being sold at any time.
- Providing leverage. When purchasing a futures contract, leverage is provided (which is specified in the contract). Loss or gain is calculated on the basis of what was acquired, although in the literal sense they were not acquired.
Types of contracts
There are two types of futures contracts – delivery and settlement. Private traders use the second type of transactions. Futures, which is a settlement contract:
- is a tool for making money on the difference in prices;
- after the end of the fixed term (expiration date) of the contract, the asset is not supplied in its natural form, but its variation margin is calculated.
Variation margin is a value calculated by the exchange that shows how much funds will be written off or credited to a trader’s trading account. As a result, the participants in the futures contract either receive a profit or remain at a loss.
How it works?
The point of trading is to buy at a lower price and sell at a higher price. It is the difference in buy and sell prices that is the trader’s desired profit. At the time of the expiration of the contract, any of the following occurs, depending on how the price of the product “behaved”:
- the price remained unchanged – the financial condition of both the buyer and the seller did not change;
- the price has risen – the buyer has earned, and the seller has lost money;
- the price went down – the buyer was at a loss, and the seller got a profit (profit).
Any of the parties to the contract, realizing that at the end of the expiration period, he will suffer losses, will no longer be able to stop the process. The exchange controls the obligation of the parties to sell / buy goods at the time specified in the agreement. Control is carried out through the obligatory payment by the participants of the contract of an insurance deposit (guarantee security). The amount of the contract is not paid in full in advance, but the “deposit” ones on traders’ accounts are frozen. The amount of the deposit is determined by the type and object of the transaction. The total amount of possible earnings on futures directly depends on the amount of funds invested. That is, the more contracts are purchased, the greater the estimated profit will be.
In financial markets, situations often arise in which a broker lends money to a trader so that the latter can open larger positions. This action is called leverage and is used when trading futures. It is not costly for brokers to provide such a service. Their possible losses are limited by the balance of the client’s trading account. If the loss equals the amount of funds on the trader’s account, the broker will suspend all current positions, preventing the client from losing more than he has left. Leverage by itself does not affect the level of risk in any way. It is influenced by the size of the position opened by the trader.
Where to work with futures?
Futures are traded on stock exchanges. For traders and brokers, exchange participants, the largest contracts are available directly. Those wishing to engage in futures trading need to open a trading account with a brokerage organization. It is the exchanges that provide clients with platforms for accessing trade, regulating its process. Major futures exchanges in the world:
- Chicago Mercantile Exchange (CME);
- Chicago Board of Trade (CBOT);
- Euronext – an international European exchange;
- Eurex (European);
- Moscow Currency Exchange (MICEX).
In addition to the above, the financial market has a huge number of exchanges with different volumes of transactions. At the same time, contracts are standardized in terms of:
- estimated timing.
These standards are not subject to change, they are permanent. Regardless of who is the seller at the time of the particular bargaining, and who is the buyer. Regardless of the exchange that organizes trading.
Registration and trading conditions on FORTS
The Moscow Exchange has established FORTS, a platform for trading fixed-term (fixed-term) contracts. To access the platform, register with a broker with access to the Russian stock exchange.
A list of brokerage companies can be found on the Moscow Exchange website – https://www.moex.com/.
Terms of access and work with FORTS:
- to start trading, an amount of 5,000 rubles or more is enough;
- an account is opened on the basis of presentation of a passport and TIN certificate (the broker may require other documents);
- the site charges a service fee of about 120 rubles per month;
- if no deal has been made for the current month, the trader does not pay for service;
- the commission for the transaction is approximately 1 ruble;
- if the transaction is completed on the day of its conclusion, the commission will be 50 kopecks;
- the schedule of futures trading coincides with trading in shares on the Moscow Exchange – from 10:30 to 18:45 Moscow time;
- there is an additional (“evening”) session for traders focusing on foreign indices – from 19:00 to 23:50 Moscow time;
- expiration is carried out four times a year, as the final settlement with the owners of futures contracts;
- taxes (13% of income) are levied once a year (when the trader withdraws funds from the account).
Gaining access to the CME exchange
In not the best times for the Russian economy, when futures on the assets of Russian companies are getting cheaper, traders think about trading on foreign exchanges. Access to electronic platforms CME is open for trading via the Internet. To start trading on this exchange:
- it is necessary to choose a broker that provides access – the choice of a broker is carried out by studying their official ratings on the websites for investors (https://brokers.ru/, etc.);
- check the selected broker is available on the website of the CME exchange itself – https://www.cmegroup.com/, having previously registered on it;
- for registration with most brokers, you only need a passport and a TIN certificate (sometimes intermediaries request an extract from the bank where the client’s account is opened or a receipt for payment of utilities);
- registration with a broker involves filling out a questionnaire with questions about the presence of a criminal record, relatives working in government agencies, etc.
Advantages and disadvantages
Working with this type of investment instrument has positive and negative sides. Benefits of Futures Trading:
- the possibility of using contracts for speculation on changes in the price of the underlying asset;
- manufacturing companies get the opportunity to hedge (insure against unwanted changes) the prices of their goods;
- to conclude a contract, there is no need to pay the entire amount of its value;
- extensive access to various assets (from the commodity market to cryptocurrencies);
- as a rule, high liquidity of contracts (but there are exceptions);
- standard form of contracts – all the conditions have already been written, all that remains is to choose the appropriate option;
- most platforms provide the ability to automate trading.
Disadvantages of futures trading are:
- in the risk of loss by traders of an amount exceeding the initial payment due to the use of leverage;
- the term of the “life” of the contract is limited, and to extend it before expiration (to hold a position), it is necessary to purchase similar instruments of the next series, which will have a negative impact on the total profit;
- not being able to clearly and accurately predict the “behavior” of prices and analyze the level of risk in each transaction, the volume of contracts and other indicators, it makes no sense to start trading in futures;
- futures trading takes a lot of time and attention of a trader.
What you need to know about futures specification?
All parameters of a futures contract are contained in a special document – futures specifications. The specification is developed by the exchange, but the relevant market regulators are authorized to approve it or not. Since the futures contracts themselves are standard, only their differences are included in the specification. It is this information that a trader needs to make a decision related to futures trading. Understanding the specification (what exactly are the parameters indicated in it and what they affect) is one of the most important conditions for competent trading. Futures specification structure:
- Name. For example, a gold futures contract.
- The size. The amount of an asset (in the corresponding equivalent) for which one contract is concluded. (5 tons of copper, 200 shares of a certain company, 3000 euros, etc.).
- Qualitative characteristic. It is indicated to fix what specific product the price is determined for, what types of asset can be allowed. As a rule, such a specific item is prescribed for raw materials (tangible) assets.
- Validity. Determined on the basis of the period specified by the contract when the settlement or delivery is made.
- Quotation. Determines the method for setting the price of an asset and depends on its type:
- for goods, stocks, currencies, the price is set by the amount of money (80 rubles per 1 euro, etc.);
- if the goods are bonds and deposits, the price is calculated based on the yield;
- for assets in the form of portfolios of several types of goods, the price is the value of the price index for the portfolio itself;
- for non-standard assets, the price is calculated individually, based on the specifics.
- Teak. The minimum change in the price of an asset allowed by the contract, for example, 1 cent. Step – the limit of a one-time price change, which can only be a multiple of this step or tick.
- Estimated price. That asset price, which is the basis for both current and final settlement of the contract.
Futures Trading Strategies
There are not many futures trading strategies. Among them, the most effective are noted:
- Hedging. Buying related asset futures. For example: an airline purchases oil futures contracts to hedge against the risk of incurring losses from an increase in oil prices.
- Acquisition of an asset. Purchase of goods at a price lower than it will be in the future.
- Speculation. Assuming that the price of an asset will rise, the trader buys it in order to sell it when the price rises.
- Scalping. As a rule, automated speculation on short-term (up to milliseconds) price changes.
- Arbitration. Opening deals that are opposite to each other. For example: buying a stock and selling a futures on it in order to get profit after the expiration of the futures.
What is the danger for beginners?
Newbie traders can lose all their money by plunging headlong into the “pool of trading”. Without enough experience, consider the dangers:
- the existence of fraudulent brokers (there are an uncountable number of them on the Internet);
- advertising promising fabulous profits with a single click of the mouse;
- hacking of accounts and accounts due to a too light password set by a trader or his storage of passwords in the public domain;
- trust of the trader himself regarding the calculation of the tax by the exchange – always carry out a rough version of the self-calculation;
- own emotions ahead of reason when making decisions.
Expanding the horizon of their own knowledge, each person inevitably encounters an area of ignorance. Accordingly, new questions arise. Below are the most common among novice investors and traders.
How not to be mistaken when choosing a broker?
It is difficult to figure it out at first. Consider the criteria:
- the presence of positive reviews and the absence of negative ones raise suspicion – reviews can be fake;
- a sufficient period of work of the company (plus the time of working with futures);
- check the brokerage firm’s license (there are special registers on the websites of the Moscow Exchange and the Bank of Russia);
- the nuances of the company’s work, depending on its needs: spread (commission), leverage, necessary trading instruments and other parameters of interest to the trader, and not the broker company.
Where can I find the history of quotes?
To develop a trading strategy and, in general, for a more complete training in trading, beginners in the field will definitely need a history of quotes for futures over the past years. Such data can be found on the official websites of brokers, as well as on specialized information financial websites, for example, https://www.finam.ru/.
Where can I find a complete list of futures?
Complete lists of futures commodities are published on exchange websites and specialized financial forums. Information is updated in a timely manner, it is possible to build lists using parameter filters.
What happens on the last day of trading?
The last day of trading (expiration) carries with it the withdrawal of the futures from trading. Also, expiration is the day of fulfillment of the obligations stipulated in the contract by the buyer and the seller. On the day of expiration for a settlement futures, the exchange sums up the results, credits and debits funds from the accounts of the seller and the buyer based on the results. Under a deliverable futures contract, the seller is credited with funds for the item, and the buyer is given the right to own it.
Do investors need futures?
Each investor decides for himself whether to use such a financial instrument as futures trading. When an investor decides to choose this instrument, he must take into account:
- futures – short-term transactions that require concentration and attention;
- holders of futures contracts do not receive passive income in the form of dividend accrual;
- in case of a long-term loss, it will not be possible to “wait out” it (until the price changes in a favorable direction for the investor) (futures are limited in time).
What are the features of choosing futures by date?
Some traders, when choosing a futures contract as a priority parameter for deciding to conclude a deal, stop at precisely those futures whose expiration date is scheduled for the near future. It is on this day that the highest liquidity is observed. Most contracts are valid for three months. Most of the contracts are executed on the 15th. By choosing futures that expire earlier than others, you are more likely to make a profit (less time is left for price fluctuations). This is not a universal, but quite common way of choosing. Aristotle also said that “fear makes people think.” Understanding the risks of futures trading encourages newbies to constantly educate themselves in the highly competitive world of securities. Each new step should be done consciously and carefully, analyzing the consequences.