However, when buying futures only a small percent of contract’s value needs to be deposited, and it is called margin. In addition, there is maintenance margin that indicates how much the value of a futures contract can fall before a call is issued by a futures broker to deposit more money, or to close a position.
Another thing with futures is that contracts can be sold prior to the futures expiration date, so the underlying commodity (i.e., 5000 bushels of wheat) doesn’t have to be taken in possession. The other side to the futures transaction, the sellers, can also buy back to cover prior to expiration time. This way they don’t need to deliver the commodity.
Therefore, many buyers and sellers are traders rather than hedgers. (Hedgers are producers or users of a commodity, such as airlines for oil, and they buy or sell these contracts to protect against undesirable price fluctuations. Financial institutions also hedge their positions with financial futures.)
Other things to know about trading futures include choosing the month of the contract (there are many options from short to intermediate and long term) as well as knowing what is the value of a tick (the minimum dollar change in the value of a futures contract as price moves up or down).
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Before we talk about specifications of futures accounts, let’s cover some basics of futures trading. Futures are contracts between futures buyers and sellers. A seller is obligated to deliver a certain quantity of a product, while buyer takes the right to future possession of it at a specified price. Futures contracts can be for financial instruments (including stocks, indices, interest rates, currencies), and for commodities (oil, gas, metals, agricultural products). There are also more exotic futures for events such as weather.
Futures contracts are standardized and trade on the exchange. A contract size will differ depending on the kind of a future. For example, gold futures trade in standard lots of 100 troy ounces, while each wheat futures contract is for 5000 bushels.
There are also mini contracts. Let’s take a futures contract on S&P Index. Standard contract for S&P 500 is $250 x index price. If the index value happens to be 1950, then the contract is for $97,500, while it is 5 times less for mini S&P futures contract (which is $50 x index value).
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Futures trading has been around for a while. Futures accounts offer investors other options than investing in the stock market or trading currencies on the spot.
Modern technology makes trading futures online easily accessible to an average person