Futures trading: how to trade futures?

Financial investment instruments include traditional products such as stocks, and derivative instruments such as CFDs and futures. These products don’t necessarily have any value themselves; however, their value is tied to an underlier, which is an asset that the derivative’s value also depends on.

In particular, futures are financial derivative contracts that are built on various types of underlying activities. In this guide, we will explain what futures are and how to buy them, in order to better understand how trading futures works and what opportunities these financial instruments offer.

Trading futures means negotiating derivative contracts between two parties, by determining a specific price and expiration date. The parties agree on the sale or purchase of an activity on a specific date at a specific price, regardless of the market’s conditions.

There are various underlying activities for futures contracts, for example, raw materials, goods, currencies and financial products. Futures can be used for speculation or protection. Futures can be resold and purchased up until they expire; therefore, they can be used to speculate on the price fluctuations of the underliers.

In the same way, they provide hedging for companies that manufacture and distribute goods, in order to limit the risks linked to price fluctuations over time. For example, if a manufacturer takes many months to sell their goods, this exposes them to price volatility; therefore, they can choose to lock in the price straight away with futures contracts.

Futures trading is an activity that allows you to purchase and sell futures, in order to speculate on the underlying activities’ price movement. The aim is to try to make a profit from these operations, by taking advantage of upward or downward trends.  Futures can be used by traders as hedging for long-term investments in order to protect themselves from short-term price fluctuations.

Trading futures works by purchasing futures based on the predicted price of underlying activity. Once the futures expire, the instrument owner must honour the contract by taking ownership of the underlier or taking the cash equivalent. This can only happen when the contract expires and no earlier; however, you can resell the futures to another investor prior to expiry. 

You can also use financial leverage on futures contracts, that is, an instrument that allows you to increase the return from an investment without using more capital. Financial leverage is a risky instrument to be used with caution, as it can offer higher profit but also bigger losses. Whether the contract should be honoured in cash or in physical goods upon expiry is established based on the futures market.  

When a trader purchases a futures contract at a specific price and the price is higher on expiry, they make a profit, otherwise they incur a loss. For example, let’s imagine that a trader purchases a futures on petrol at £50 in December that expires in March. If the value of petrol has risen to £70 in March, the trader has made a profit of £20, from which the cost of the operation and taxes must be subtracted.

Whereas, if the price of petrol has fallen to £35, the trader has incurred a loss of £15. With leverage, you can purchase multiples of futures contracts; therefore, rather than buying one futures on petrol, you can purchase 100 or 200. In this case, the potential return is much higher, but the losses could also be high if you predict the underlier’s price trends incorrectly.

To trade futures in the UK, you must rely on an intermediary authorised by the FCA (Financial Conduct Authority). In this way, you can open an investment account and access a specialised platform to make use of advanced graphs and trading indicators with which you can study the market and create investment strategies.

With FinecoBank, you can have modern trading platforms at your disposal, with the security of a major European bank and the opportunity to invest via various financial instruments such as futures, ETFs, CFDs, options and bonds. In particular, you can invest with futures on CME, EUREX and IDEM, with up to 20x leverage on Micro E-Mini futures and solutions for intraday and overnight trading.