What are Futures Contracts?
A futures contract is a binding agreement between two parties to buy or sell an asset at a price on a specific date in the future. The asset could be stocks, bonds, currencies, commodities or derivatives.
Futures contracts were initially created to help farmers stabilize prices for their crops. They would sell a futures contract for their crop at a fixed price so that if the price of their crop dropped by the time they harvested it, they would still receive the agreed price.
How do futures contracts work?
When buying a futures contract, you agree to purchase the underlying asset at a set price on a specific date in the future.
For example, if you buy a crude oil futures contract, you agree to purchase 1,000 barrels of crude oil at the fixed price on the delivery date.
If you sell a futures contract, you agree to sell the underlying asset at a set price on a specific date in the future.
The delivery date is when the contract expires, and the underlying asset must be delivered.
Advantages of trading futures contracts
There are several advantages of trading futures contracts.
Price stability
As mentioned earlier, one of the original purposes of futures contracts was to provide price stability. By buying/selling a futures contract, you are locking in a price for the underlying asset, which can help protect you from price volatility.
Liquidity
Futures contracts are highly liquid and can be easily traded, making them ideal for hedging or speculating on movements in the market.
Leverage
Futures contracts offer leveraged trading, which means you can control a more significant position with a smaller initial investment.
If you were to invest $1,000 in a crude oil futures contract, you might be able to control 10 barrels of oil worth $10,000.
Disadvantages of trading futures contracts
There are a few disadvantages of trading futures contracts.
Risk
As with any investment, there is always the risk of losing money when trading futures contracts.
No voting rights
When you buy a company’s share, you are given voting rights. However, you do not have any voting rights when you buy a futures contract.
Unlimited losses
Unlike stock investments, which have a limited downside, futures contracts have the potential to lose an unlimited amount of money.
How to start trading futures contracts in Singapore?
Find a futures broker.
The first step is to find a reputable futures broker who can help you trade futures contracts.
You can do this by searching for “Futures Brokers Singapore” or by checking out the list of brokers on the Singapore Exchange website.
Open an account
Once you have chosen a broker, you will need to open an account and fund it with enough money to cover your initial future investment.
Learn about the markets
Before you start trading, it is essential to learn about the markets and understand how they work. There are resources available online, such as tutorials and articles, to help you learn about the markets.
Choose the proper futures contract.
Not all futures contracts are created equal. You need to choose the proper contract that matches your investment strategy.
Place a trade
Once you have familiarized yourself with the markets and chosen a contract, it’s time to place a trade.
Make sure you understand the risks involved before placing any trades.
Monitor your trades
It is essential to monitor your trades and make sure you are making money or at least not losing too much money.
Make adjustments as needed.
It’s crucial to make adjustments as needed based on the current market conditions.
Have a plan
It is essential to have a plan before you start trading futures contracts. It will help you stay disciplined and make better trading decisions.
Conclusion
Trading futures contracts can be a great way to make money in the markets, but it is essential to understand the risks involved and trade them correctly. If you follow the steps in this guide, you will be on your way to becoming a successful futures trader in Singapore.
