Investing in futures can be very challenging and rewarding at the same time. It is one of the securities that you can invest in besides shares and bonds. Futures basically involve many different types of investments like stock index, commodities and such.
How does it work?
The term financial derivatives will usually come to mind when it involves futures. As the name implies, it is a financial tool that derives its value from a price movement. In investments, futures are commonly the oldest type of contracts of derivatives. It all started during the agricultural era when farmers hedged their changes in their crop prices. This would then determine when their produce can be harvested before being sold.
This is why when you trade futures, you will potentially be trading livestock prices like cotton, soya and such. However, some markets involve livestock like cattle and other too. In the modern environment, the market has expanded and include other types of items like gold and oil as well.
Is it the same as other investment types?
Futures are different in some ways and similar in terms of mechanism. To understand this, it must be noted that the value of a certain price is determined by the movement of another. As they are commodities and daily goods, these contracts have finite life and does not last very long like shares and insurance.
As such, it is quite common that certain future contract has an expiry date. What this means is that when you trade futures, you need to be aware of how long you have before it expires so that you can plan your strategy around that.
What you need to know?
Generally, trading futures is similar to trading stocks where you are involved in the business of speculation. In this context, what you are doing is that you are speculating the price of the commodity on its price of what might happen in the future. In other words, you want to try and capture the price that either goes up or goes down.
You will be surprised that trading futures can involve speculating the price of corn, gold, steel, wheat, beef or even currency. Basically, whatever item that has a varying price depending on the supply or demand in the market could be traded. There will be some form of time differences as you can trade prices of futures of the American market while being in Malaysia which means you would need to be up and trading during the night.