Futures – Basics, Tips and Background Knowledge

What exactly are futures and how do they work? Are you already trading derivatives and using futures for your investments to hedge or maximize returns? On this page you will find useful information and tips about futures.

 

What are futures?

• Futures are a financial product that belongs to the derivatives category (forward transactions).
• When you sell a future, you commit to delivering a commodity or asset such as a stock to the buyer at a date in the future and at a price both agreed upon at the time the contract is concluded. Unlike options, futures are unconditional forward transactions, meaning they must always be executed.
• When you buy a future, you in turn commit to accepting the agreed commodity from the seller on the agreed date at the agreed price — regardless of what the current market price or share price looks like at that time.

 

The most important features and parameters of futures contracts

• Futures are traded in a standardized manner on exchanges and are more heavily regulated than other speculative financial products (such as forwards, which are not exchange-traded).
• With futures, unlike options, you do not have to pay a premium upfront.
• However, there must always be a minimum balance in your account when you open a new position. This security deposit (called Initial Margin or Intraday Margin) only needs to be a fraction of the actual value of the future. If you want to hold the future overnight, you may need a higher margin (Overnight Margin). 

There are different types of futures with various underlying values (called underlyings or base values). Here are some examples:

• Future on a market index/stock index (Eurostoxx 50, S&P 500, Nasdaq 100, ...)
• Future on a stock (Microsoft, Amazon, SAP, ...)
• Future on currencies/forex pair (EUR/USD, ...)
• Future on a commodity (oil, gold, silver, copper, ...)
• Future on a bond (e.g. German government bond, corporate bond, ...)

Use cases and strategy examples for futures

• You can use futures to hedge against market fluctuations and price drops, thereby minimizing risk factors.
• You can also use futures for speculation with high returns.

 

Advantages of futures

• Low capital requirements, but high returns possible.
• Wide selection of underlying assets.
• Standardized trading on stock exchanges.
• Simple way to bet on falling prices (going short).
• Possibility to hedge against financial crises or sharply falling prices.

 

Disadvantages of futures

• Very high losses possible.
• Unlike holding stocks, you do not receive dividends for purchased futures.
• Trading futures is a fairly complex subject area and requires basic prior knowledge. For private individuals, a certified eligibility for forward transactions is also indispensable.

 

 

Sources and interesting links

1. whselfinvest.de - Futures are easy to understand
2. finanzfluss.de - What are futures? Futures explained simply!
3. gevestor.de - Futures

 

Do you have any further tips and suggestions for trading futures? What are your experiences with these derivatives? When and how do you use them in your investments? Feel free to leave a comment.

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