The futures market is an investment product that belongs to financial derivatives. These types of markets allow us to speculate about the future direction that an asset may take. However, we must know how these types of markets work, since they can give us joy and headaches at the same time. Let's see what futures markets are and how we can take advantage of them.
What is the futures market.
The futures market is an investment product that belongs to financial derivatives. It is an investment alternative that allows us to buy or sell a financial asset by agreeing on the time and price of the operation. However, you must have knowledge of this type of markets since it differs from the usual functioning of financial markets. This is because, for example, the value of our contract is fixed at the time we make it and there is arbitration that can influence prices. This does not mean that we have to maintain the operation until the agreed date, since we can liquidate the position without having to wait for the date by paying at the market price.
How to generate profits in the futures market.
It may seem complicated at first glance, but it is actually simpler than it seems. Futures markets are often used to buy stock indices, commodities or cryptocurrencies. To put ourselves in context, futures markets make purchases on credit, given that the asset will be paid at a previously determined time.
How the futures market works with examples.
To understand what a futures market is, we must understand the most important concepts about futures markets and specifically, futures contracts, which are the assets that are traded in this type of markets. Futures contracts are made between product suppliers and producers to deal with market volatility. These two parties negotiate these contracts with an investor who assumes the risks associated with these markets as well as the rewards that can be obtained by taking advantage of the volatility.
Operation of a futures contract.
For example, if a soybean farm sells soybeans for $1.000 a bushel (soybean unit in futures trading) to its suppliers and the supplier sells for $1.500 and both generate profits at those prices, they will be interested in maintaining these costs with fixed conditions based on fixed interest rates. This is where the investor enters the scene, accepting that if the price of soybeans falls below agreed levels, he is responsible for paying the difference to the soybean producer. Of course, if the price of soybeans rises to agreed levels, it is the investor who can maintain his profits. For the soybean supplier, if the price of soybeans exceeds agreed levels, the investor pays the difference and the supplier can obtain the soybeans at a more predictable price. However, if the price of soybeans is below agreed levels, the supplier pays the same price and the investor generates profits.
Advantages and reasons to invest in futures.
Futures markets are a product that gives us different advantages over traditional markets. In addition to providing liquidity to the markets, These allow operations to be carried out with a level low leverage with low risk, since we have a contract that gives us a guarantee. This is how we manage to generate great profits and be able to multiply our capital in a short time. However, the potential losses to which we are exposed are equivalent to the profits we can generate, which is why we must be aware of these markets.
Daily gold futures (GC) trading volume. Source: CME Group.
Another advantage of futures markets is the wide range of markets available to investors. Futures markets are present in the stock market, indices, commodities or cryptocurrencies. In turn, these markets are regulated, which gives us an extra guarantee in case of defaults or other unfortunate events. Furthermore, the Bitcoin (BTC) and Ethereum (ETH) futures markets allow us to take advantage a market rarity What happens during the gaps that are generated in the opening of contracts at 12am at the end of the weekend closing.
Where futures markets are traded.
Futures markets are traded on futures exchanges, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE). Within them, all types of futures contracts are traded, such as those related to currencies, stocks, indices, cryptocurrencies or the raw materials market. In order to understand the symbols of contracts, we must look at the letter and number of the contract. The letters represent the month in which the futures contract expires. For example, ES contracts expire in March (H), June (M), September (U), and December (Z). The number instead, represents the expiration year.
Expiration schedule for S&P 500 futures contracts. Source: CME Group.
With the previous example, a contract that ends in September of this year would be "ESU23«. This indicates the expiration date of a futures contract, this being the last day that can be negotiated. Otherwise, the contract will be settled in cash or physical delivery will be made. This date may vary, but as a general rule they expire on the third Friday of the month of the expiration date.