Futures contracts (futures): what they are and how to trade correctly

Hello, dear blog readers! Every day, well-known financial instruments, such as currency pairs or stocks, are becoming less and less attractive for private traders who work with relatively small capital. Of course, this puts investors in a difficult position. However, this does not mean that online trading has completely exhausted itself: to get back into the game, you just need to reconsider certain accents and switch your view to new ways of investing. Derivatives , namely futures trading, deserves special attention Actually, this is what we will talk about now.

Just about the complex: what is a futures contract (futures)

Imagine that you want to buy a new smartphone. You found a seller, you were satisfied with the product and its price, but bad luck - the smartphone itself is not yet in stock. The seller is ready to deliver it to you in 15 days. What if the price of the phone increases during this time? To insure yourself against the risk of overpayment, you enter into a purchase contract with the seller now and make an advance payment. This contract is essentially a futures.

In the financial market, as in ordinary life, such transactions occur quite often. And speaking in general terms:

Futures (from the English Future, “future”) is a contract under which one party (the seller) undertakes to deliver the underlying asset to the second party (the buyer) at a certain time in the future and at a pre-agreed price.

But in fact, physical purchase and sale under the terms of the contract does not always occur, since not all futures are designed for this. Most often, traders use futures to benefit from differences in the price of an underlying asset.

Advantages of holding

Conversion transactions have long become commonplace for banks. Thanks to them, it is possible to exchange currencies between individuals and legal entities. They really have a lot of advantages. But among the most prominent:

• Full transparency. All financial manipulations within a banking institution are carried out with a minimum spread at the current exchange rate (in this matter it is customary to rely on information from the MICEX - Moscow Interbank Currency Exchange).
• Settlements between counterparties are carried out extremely quickly. The money received through the transaction is quickly transferred by the bank to the specified account without delay. If necessary, you can schedule an urgent transfer.
• You can work in two modes at once (deposit and pre-delivery). Companies that do not have credit restrictions have the right to operate until the end of the working day.

Types of futures: ship goods or pay profit

All futures are divided into 2 types: delivery and settlement.

1. Deliverable are contracts that involve physical delivery of a product (service) upon the expiration date of the futures contract. For example, if you purchased a futures contract for 100 barrels of Brent oil with an expiration date of 30 days, then after a month you will actually receive your 100 barrels of “black gold”. It is deliverable futures that are closest to their ancestors - forwards. 2. Settlement - futures that do not provide for the delivery of goods, but purely monetary settlements between the parties. For example, according to a settlement futures contract for the same oil, you will not receive a shipment of oil barrels. You can either sell the futures before the expiration date (as soon as the quote is more favorable for you), or wait until the last day of trading, when the deal will be closed at the current market price.

Since most of us do not need huge volumes of gold, grain, oil or, for example, corn, settled futures are of greater interest to traders.

What is futures and how does it work?

Futures, like many other financial instruments, are traded on exchanges. The essence of futures trading is to take a contract at the lowest price and sell it at a higher price.

As a result of the transaction, three situations may arise:

1. The price of the contract does not change, and both players (who bought and who sold) remain with their own money. 2. The product increases in value, and the buyer makes a profit from this, since he purchased Futures at a lower price. 3. The value of the asset decreases, and the buyer remains at a loss, and the profit goes to the seller.

Let's deduce the main principle of making money on futures: you need to purchase a contract for the underlying asset at the most favorable price for you, in order to later close it at the best price and put the difference in your pocket.

Margin and financial results of futures

When speculating on futures contracts, daily changes in the liquidity of purchased/sold assets are important. To calculate the profitability of transactions, an indicator is used - variation margin, which is calculated from the difference in price on different days, taking into account the contracts involved in financial transactions.

Regular calculation of the variation margin allows you to timely determine the moment to sell previously purchased futures.

Calculation formula: Variation margin = (Pn – Pn-1) * N, where:

• Pn — futures price for the current date (n), in rubles.
• Pn-1 — futures price at the end of the previous day (n-1), in rubles.
• N is the total number of contracts, in pieces.

The indicator is calculated at the end of each trading day, which allows you to see the dynamics of changes in profit or loss from futures trading on the exchange. Based on the current value of the variation margin, the trader determines the need to sell contracts or the possibility of continuing to wait for a more favorable moment for the transaction.

Underlying asset and futures expiration

Futures as a market instrument have two important characteristics:

1. Underlying asset

The underlying asset is the commodity in relation to which the transaction is carried out. These can be various market assets: stocks, bonds, stock indices, currency, oil, gas, gold, silver and other metals.

The difference between an underlying asset and a futures contract is that the contract does not take on the properties of the asset itself. For example, if you buy a futures contract on a stock, you will not own it and, therefore, will not receive dividends on it. Therefore, futures are not the most suitable instrument for long-term investments. At the same time, an important advantage of contracts is that their acquisition requires much less funds than the purchase of the same volume of the underlying asset.

2. Expiration date

All types of futures are executed at a strictly defined time, which is called the expiration date. This period is set by the exchange on which the futures are traded. For example, this could be quarterly or monthly contract closures. Before expiration, futures can be sold if the purpose of the original purchase was speculative trading.

Futures trading times on different exchanges

Futures are traded on specialized exchanges. The largest of them are the CME (Chicago Mercantile Exchange), the New York Exchange, and the Moscow Exchange.

Each trading platform has its own opening hours. So, for example, on the Chicago Stock Exchange the time is Chicago time, which has a difference with Moscow time of 10 hours in winter and 9 hours in summer. That is, futures trading time starts at 2:00 Moscow time.

On the Moscow Exchange you can carry out transactions with futures between 10 a.m. and 11:50 p.m. During trading there are two clearing breaks where trading is suspended. Clearing is the recalculation of the variation margin for all transactions made during one trading session, in other words, the moment of determining which of the trading participants lost or earned how much.

But NYMEX (New York Commodity Exchange) opens its doors at 8:10 am New York time and closes at 15:20. The exchange is available for trading from Monday to Friday.

Conditions for conducting conversion transactions on the foreign exchange market

There are certain rules according to which spot transactions are carried out. They are not officially reflected anywhere, but everyone (participants) must adhere to them.

Below we list the most important ones:

• Transfer of funds must be made no later than 2 days after signing the agreement. The predetermined amount cannot be changed by adding a percentage increase.
• For the most part, spot transactions are carried out through electronic trading platforms, which provide for the sending of notifications the next day.
• The exchange rate existing at the time of execution of contractual obligations cannot be changed, despite the dynamics towards growth or decline.

Forward contracts and futures: what is the difference between them

Let's move a little away from modern exchanges and delve into history. In the 19th century, international trade began to gain momentum. In particular, Great Britain, as a world leader in industrialization, began to more actively purchase imported raw materials for its plants and factories. And in the USA at that time there was a period of active economic development: the country began to produce raw materials, cotton, gold on a large scale and supply its goods abroad. But at that time, the most popular method of buying/selling was not exchanges, but auctions, and pre-purchases were not yet so common.

But over time, buyers became convinced that buying goods while they were still on the way was much more profitable. After all, situations like this have probably arisen more than once:

Buyer in England:

“Sir, we need 3 tons of cotton from the USA. At what price are you willing to sell them to us?”

Seller in America:

“Yes, of course, we will sell you cotton. Price $1000 per ton. We will deliver by sea in 1 month. Arranges?"

Buyer:

“Yes, deal!”

But when the goods were delivered to the shipping point, it turned out that its price was already higher than the previously stated one. Because due to bad weather the ship had to be repaired, and this is an additional expense. And then there is a shortage of cotton in the world, so why shouldn’t the seller now earn more for his goods? Of course, buyers suffered losses. And to avoid this, they began to hedge their risks by concluding forward contracts - transactions for future delivery at a predetermined price.

Forwards were, as it were, the progenitors of modern types of futures, although today they are also traded on the exchange along with futures contracts. What are the differences between these two tools:

In addition, forwards are less standardized than the more popular futures, so most derivatives traders prefer futures contracts.

The history of futures

The first such deal was concluded in the mid-19th century in North America. Until the middle of the 20th century, futures belonged exclusively to the agricultural market, because it is here that the benefits from a predetermined price for products are most clearly manifested. Farmers in the 19th century had a hard time planning sales. Until they came to the fairs, it was difficult to understand whether the product was in demand this year.

The emergence of futures is associated with the desire of commodity producers to protect themselves from “price jumps” for products.

If a high harvest resulted in a surplus of produce for all sellers, the surplus usually had to be destroyed. In the opposite situation, a scarce product immediately rose sharply in price and brought fabulous profits to the manufacturer. A farmer is closer to stability when he is confident in the realization of the result of his labors.

For this reason, they began to agree in advance on volumes, prices and guarantees for the purchase of grown products. This was the key essence of the futures - both parties to the transaction knew in advance about its completion, the seller, along with the buyer, was protected from unpredictable price changes and other force majeure circumstances.

Futures for... air: the most exotic contracts

In addition, forwards are less standardized than the more popular futures, so most derivatives traders prefer futures contracts. Forwards Futures are needed primarily for the delivery of goods. Most often used to make monetary profits in trading. The owner of the contract is one person. Can be transferred from one market participant to another (resold). The contract may stipulate any terms of the transaction that the seller and buyer deem necessary. Basically, only the value of the asset and the expiration of futures are indicated.

In theory, a futures contract can be concluded on any underlying asset. And in the air too? Well, to some extent yes! Or rather, on its temperature, wind speed, atmospheric pressure and other climatic parameters. Don't be surprised, we are talking about one of the most exotic market instruments - weather futures.

Weather futures were invented in the 1990s. And yes, they are also in demand on the market - mainly among companies whose profits directly depend on how many degrees Celsius (or Fahrenheit) it is outside the window. Statistics show that almost a third of world business (tourism, agriculture, some industries) are in one way or another connected with weather cycles, so now you can even make money on this.

For example: in London the average temperature in April is +20 degrees. We open a long position in futures for April temperatures in Foggy Albion. April 1st arrives, and the temperature is 2 degrees higher, +22. The next day it drops 5 degrees. And so on.

Thus, at the end of the month, the average value is calculated, and if it is higher than what was specified in the contract, then the futures holder will make a profit. It sounds a little strange, but such unusual types of futures as these once again prove that the financial market offers almost limitless opportunities for making money!

Futures and leverage: a double-edged sword

The futures market uses financial leverage known as leverage. Leverage allows you to carry out transactions for larger amounts without having large capital. For example, if the contract has a margin of $5,000, and you do not have such funds, you can use financial leverage - say, 1:10. In this case, you only need to deposit $500, and the broker pays the rest for you. And in this way, futures trading is similar to Forex trading.

What is the advantage of leverage? The fact is that even a slight fluctuation in the contract price helps the trader get a solid profit. And this usually attracts novice traders who do not have large amounts to start with, but strive for high earnings. However, it is worth keeping in mind that leverage can also lead to losses that will also be much larger. It often happens that a change in the price of the underlying asset by even 3-4% leads to a margin call being triggered for the trader.

To use leverage wisely in trading, you need to have certain experience and risk management skills. And this is where Forex traders trading at Gerchik & Co are in a more advantageous position than participants in the futures market. After all, our company offers all its clients a free “Risk Manager”, which helps professionally and, what is important, automatically manage trading risks.

How many futures can you buy for 1000/5000/10000 dollars without leverage?

To answer these questions, we need to look at a specific example. First, you need to understand how the cost of one futures contract is formed? On the first day of circulation of the instrument, the price is set by the trade organizer - the exchange. Subsequently, futures quotes change under the pressure of supply and demand.

Clearing - write-off, as well as accrual of VO ( variation margin ) is carried out daily 5 times a week, except holidays and weekends. Consequently, profit and loss are also calculated daily , and not only during the period of sale of the trading instrument. At the moment of opening a trading operation, a certain amount of money is frozen in the investor's account; it will not be available as long as the investor is the holder of this contract.

On exchange websites you can find complex and confusing collateral tables, which are extremely difficult for a beginner to interpret. Therefore, it is better to use the assistant site rjobrien , which contains a summary table of margin deposits. An alternative source is the tradeinwest website ( futures specification , margin requirements ).

Example

As an example, we use the same gold futures, which is located in the CMX . Look in the Spec Init , which displays the initial margin. Let this parameter be equal to $10,125 . This means that to purchase and stable trade such a contract, an investor will need a deposit of at least $12,000-13,000.

The next column displays the parameters of the maintenance margin, in our case this is the amount of $7,500 . If the deposit contains less than the specified amount, a so-called Margin Call . Accordingly, you will either have to record losses or deposit additional funds.

As for commissions , it all depends on the broker. By collaborating with companies that were proposed earlier, the investor will be able to save a lot on commission costs . I will also provide a table with the conditions of major brokers.

Futures trading strategy: which one to choose

There are different ways to make money on futures. There are three main strategies for how to make money on these contracts.

What are managed futures

Futures are considered to be more suitable for speculative trading rather than investment. However, professional investors know how to use this tool to hedge risks in their portfolios. To do this, they use managed futures.

Essentially, managed futures are a balanced mix of futures across different asset classes. For example, this could be investments simultaneously in commodity assets, currencies, and bonds. And if a trader receives a loss on a certain group of assets, it is compensated by profits on other underlying assets. After all, as a rule, it does not happen that all markets fall at the same time: when some are in decline, others are up.

Assets for managed futures accounts need to be selected only the most liquid and regulated, and if some of them become illiquid, the manager replaces them with others.

Managing an entire basket of futures is not easy, you need to clearly understand which trading strategy will bring success. Therefore, this method of investing is available only to professional stock trading consultants. Investors turn to his services and pay him a certain percentage for his work.

Futures on stock market assets: trading features

Stock market asset contracts are very popular futures. Therefore, it is worth talking about how to trade futures on the stock market. The contract can be concluded for:

• shares of companies (Apple, Amazon, Tesla and any others that are traded on stock exchanges);
• stock indices (S&P 500, RTS, etc.);
• bonds.

Let's look at how to use futures using Microsoft shares as an example. Let's assume that one security of this company costs $250. And if you buy a delivery futures contract for 1000 shares with an expiration period of 3 months, then you enter into an agreement with the seller that you will receive shares at this price within the specified period. Regardless of what the stock price will be at the time the futures contract closes. Therefore, if their price increases, you will be in the black, since you made a profitable purchase.

With a settled futures contract, you simply get the difference in price. Let's say that after 3 months the price of Microsoft securities has risen by $10, and you will already have a profit.

Results

We looked at the key features of trading futures contracts. This is a truly profitable derivative financial instrument. Therefore, if you take trading seriously , you will be able to achieve a positive result in the shortest possible time.

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What you need to remember about stock futures

To effectively trade stock, bond or index futures, you need to have a good understanding of the factors that influence the value of those underlying assets. Here's what you'll need to consider:

Corporate reporting . Every quarter, companies whose securities are traded on the stock exchange report on the state of affairs - profits or losses. During these periods, volatility in the stock market increases greatly, and traders closely monitor every news.

If a company has demonstrated growth in its earnings, this usually increases the value of its shares. A loss report, on the contrary, encourages investors to sell off the company's shares, which causes their quotes to fall. At the same time, analysts always make preliminary forecasts about how a particular corporation will report. And if the actual indicators differ greatly from the forecast, then the growth of its shares will be more rapid. Accordingly, if the data comes out worse than the forecast, the stock price may collapse sharply.

Splits . Sometimes companies, in order to attract more shareholders, divide their shares proportionally - for example, doubling them. At the same time, the company’s capitalization does not change, but the value of one of its shares decreases in accordance with the split (when the number of shares doubles, their value decreases by half). Therefore, a trader needs to constantly monitor the decisions of company management.

Central bank rates . This is relevant for bond futures, since bonds (debt market securities) largely depend on the general state of the economy of the issuing country. When the economy grows, the Central Bank usually allows itself a tighter monetary policy and increases the refinancing rate. If a crisis occurs, the central bank stimulates the economy with cheaper liquidity and reduces the rate.

The asset is also affected by news and decisions of various officials. And even weather forecasts. It is also worth considering the economic and political situation.

Clue:

want to select the most profitable stocks? Watch Sergei Zabotkin's webinars on the Gerchik & Co YouTube channel, where the expert explains in detail and clearly which securities will bring the greatest profit and why.

Futures on foreign exchange market assets: how to trade profitably

A futures contract for a currency pair is a contract for the purchase/sale of a particular currency in the future at the rate established at the time the contract is concluded. And such futures are often used to make a profit from the difference in currency quotes. Wait... but isn't this Forex? After all, trading on the Forex market also involves transactions with currencies in order to make money on exchange rate fluctuations. But still these are different things, and here's why:

The Forex market is over-the-counter, decentralized. The futures market, on the contrary, is centralized, concentrated on several exchanges. And it is these exchanges that regulate the relationship between traders, establishing certain conditions for concluding transactions.

On futures exchanges, the spread is always fixed. And in the Forex currency market there are floating spreads that change depending on supply and demand, as well as liquidity volumes. And there are times when spreads reach zero, which is very beneficial for traders. So, for example, in Gerchik & Co all transactions are displayed on the interbank market, so a number of currency pairs have zero market spreads.

For currency futures, a trader needs to take into account the same fundamental factors as for Forex trading. Namely, follow the economic calendar, where data on GDP, business activity, inflation, unemployment and other important data affecting exchange rates are published.

How many futures can you buy for $1000/5000/10000 with leverage?

The amount of leverage depends on the trading conditions offered by the selected broker. The most common companies offer ratios of 1:14 and 1:17 .

To understand the calculation scheme, be sure to watch the following videos. It calculates the number of gold futures contracts.

Trading algorithm

1. We determine the current value of the futures contract;
2. We look at the size of the guarantee;
3. We divide the deposit amount by the size of the collateral and get the number of available contracts.

Now let's look at an example . Let's calculate the number of gold futures contracts that we can purchase with a deposit of $1000, $5000 and $10,000. Just a warning: the calculations made are approximate and may vary depending on various trading parameters.

• Current value of a troy ounce 1268$;
• Warranty 6233 rubles or $109 ;
• Leverage 1:14.

We count the number of contracts for different depot sizes. We divide the deposit amount by the amount of the guarantee.

Thus, we calculated the maximum limit that the deposit can withstand. When entering a trade, it is important not to forget about risk management and the downside of leverage. Let's say you have $5,000 in your account, and you can buy 45 contracts with it. Since you are a smart trader, you limit your risk to 3% when entering a position. In money terms this is $150. This way you work with 1 contract. Depending on the situation, the numbers may change, however, you have no right .

Commodity futures: how to trade oil contracts

Commodity futures allow you to make money on oil, gold, silver and other commodities. Of course, traders who do not need metal bars or oil in barrels trade not delivery, but settlement contracts in order to make a profit solely from the difference in asset prices.

How to make profitable trades with oil futures? To do this, you need to understand what most affects the value of this asset.

Oil is the main fuel resource, and it is not for nothing that it is called “black gold”. The oil price is also influenced by the economy - especially data on oil reserves in the United States as one of the largest consuming countries. So keep an eye on the economic calendar for the dates the Department of Energy releases the latest inventory data.

The price of oil is also affected by the volume of its production: the more “black gold” is produced, the greater the supply on the market, and it exceeds demand. This means that the price of a barrel of oil will decline. Conversely, when demand is higher than supply, the value of the asset rises. Oil production volumes are largely regulated by OPEC, and meetings of this organization often form medium-term and short-term trends in the oil market.

What is a futures?

A futures is a contract concluded between two investors. The subject of the agreement is the delivery of the asset within a clearly established time frame and at a pre-agreed price. In such a trading operation, the exchange acts both as an intermediary and a regulator.

Let's try again to understand what a futures is, but now in simple words . Let us explain the essence of this derivative financial instrument using an example. Let's say you have 3 tons of grain, but this year a record harvest is expected, which will ultimately cause the value of this asset to decline. How to insure yourself against possible risks?

It is enough to conclude a futures contract by selling grain at a set price . Let’s imagine that at the time the agreement was signed, the price had not yet dropped. Thus, if the fears come true, the buyer of the asset will lose money, while you sell the grain at the highest possible price.

However, the proposed example is more of a theory , because private investors do not trade grain, they earn money through speculative trading operations. Futures trading is designed in such a way that each participant in the transaction will be able to transfer their obligations to third parties, which actually allows you to speculate without waiting for the actual delivery of the asset. Not to mention that there are special futures contracts that do not require physical delivery of an asset.

Educational introductory videos

To reinforce the material, be sure to watch a series of videos that will introduce you to futures.

First.

Second.

CompoteThird.

“Gold” futures: what determines the profit on contracts for the yellow metal

For a long time, gold was the main means of payment, and to this day the precious metal has retained the status of a protective asset, or a safe haven asset for capital during periods of economic instability.

The price of gold largely depends on the state of the world economy. When the situation improves, the demand for gold falls as interest in higher-risk, higher-yield assets increases. And when a crisis comes, market participants seek to invest in something more reliable, and then the demand for the “yellow metal” increases, pushing the price up.

It is also important to pay attention to the correlations between gold and currency pairs involving the dollar. The correlation can be direct or reverse. Let’s say that when the exchange rate of the Australian dollar against the US dollar rises, then an upward trend will be noticeable on the gold chart. And when the dollar strengthens, for example, against the euro, then gold loses in price.

It is worth remembering that an expensive dollar makes gold purchases less profitable, so there is a pattern: the higher the dollar exchange rate against other currencies, the greater pressure this puts on the cost of an ounce of gold.

The most popular futures with high liquidity: top 5

Liquidity is an important factor when selecting trading instruments for trading. High liquidity means tighter spreads (which is beneficial in any trading strategy) and “cushioning” during unexpectedly sharp jumps in volatility (to accelerate the price of a liquid future, much larger trading volumes are needed than for an illiquid one).

Here are the top 5 most liquid and popular futures and their brief characteristics:

Tip: Are you interested in detailed analysis of gold, oil, stock and foreign exchange markets? Go to the Forex broker Gerchik & Co website in the “Trader”, “Analytics” section and read the latest market reviews from the company’s experts.

Useful tips for novice investors

1. For novice investors, it is best to start with the Russian derivatives market, using highly liquid trading instruments : the RTS index, Gazprom shares, currency pairs EUR/USD , RUB/USD . Trading futures contracts on these assets is characterized by excellent returns.
2. To build a trading system , you must first undergo appropriate training. Investors mainly use mechanical strategies based on the work of indicators. You can also use candlestick analysis tools. To do this, I recommend reading the article “Japanese candles for beginners.”
3. Before you start trading with real money, thoroughly hone your skills on a practice trading account . It is also advisable to select two markets at once in which the effectiveness of strategies could be tested.
4. Develop your own risk management system to constantly monitor the size of your trading account and reduce the likelihood of a complete loss of your deposit.
5. Enter into a user agreement with one of the previously proposed brokers - Zerich or Just2Trade.

Video series for beginners and more

Watch the training webinar conducted by the director of the Zerich . After viewing it, you will learn how to trade futures through the QUIK .

Webinar organized by Finam . It describes in detail the principles of making money from oil and gold.

Useful video about warranty coverage .

An animated cartoon that calculates the cost of purchasing BRENT .

Another video explaining the principle of making money on oil using futures.

Futures and CFDs: what is better for a trader to trade

In addition to futures, there is another derivative instrument popular among traders - contracts for differences, or CFDs. Their similarity is that the contract must be based on some underlying asset. In the case of CFDs, this is a currency or cryptocurrency pair, security or commodity. The CFD trading strategy is also similar to settled futures trading: the trader profits from the fact that the value of the asset has increased or decreased compared to the moment the trade was opened. That is, both instruments involve the payment of profit without physical delivery of goods.

But there are a number of significant differences between these tools:

What is more profitable for a trader: a futures contract or a contract for difference? As you can see, CFD has many advantages:

• You can start with a small capital, since the CFD trade size is much smaller than what is needed for futures trading.
• If with futures everything is determined by the exchange, then in the case of CFDs you can choose the broker yourself, who determines the trading conditions.
• A contract for difference in prices can be closed at any time convenient for you, while a futures contract must be executed within a strictly specified period, which may not always be beneficial for the trader.
• Another plus for CFDs is the ability to trade them directly from the MT4 or MT5 platform. For example, at Gerchik & Co you can download both platforms for free and gain access to CFDs on over 300 underlying assets. At the same time, you will have comfortable and favorable conditions for trading, which will be discussed now.

What is a futures: types and mechanism for carrying out futures transactions

Hello, friends!

Often, newbie investors come to the stock exchange to earn a lot and quickly. They heard that one made a 10% return in a month, and another made a 100% return in just a year. Everyone wants the same. There are ways to achieve this, but for some reason 9 out of 10 investors lose their capital and become disillusioned with their investments. This happens for one simple reason - the use of tools whose mechanism you do not understand anything about. One of these tools is the hero of the new article. Let's understand what a futures is in simple words and how it works in the derivatives market.

Concept of a futures contract

A futures contract, or futures for short, means an agreement in which one party agrees to buy and the other party to sell an asset in the future at a predetermined price. Such an asset is called the underlying asset.

The exchange is the intermediary and guarantor that the transaction will be carried out without violating the agreements. It takes a guarantee from the seller and buyer - this is a deposit in the form of a share of the contract value, which is returned to the participants after completion of the transaction.

The following types of futures are distinguished:

1. for stocks and bonds;
2. for metals (copper, gold, palladium, etc.);
3. for energy resources (oil, gas, gasoline, etc.);
4. for agricultural goods (meat, grain, cocoa, cotton, sugar, etc.);
5. on stock indices;
6. for currency.

There are even futures for market volatility, Central Bank interest rates, and inflation rates.

The essence of a futures transaction: the buyer assumes that the price of the underlying asset will increase in the near future and he will be able to make money because he has entered into an agreement with the seller at the current price.

The seller also seeks to make a profit, but he assumes that the price will decrease, and he will deliver the asset at a more expensive one. In this case, one of the parties will win, the other will lose.

But if the price of the asset does not change, then the participants in the transaction will not earn anything and will not lose anything.

Futures should be distinguished from another derivatives market instrument – ​​options. The latter is an agreement that fixes the buyer’s right to buy, and the seller’s obligation to sell the underlying asset. A futures contract creates an obligation for all parties to the transaction.

Futures contracts are risky investments. No party can predict with 100% certainty where the market will go or how the underlying asset will behave. You can make good money if the forecast turns out to be correct, or you can suffer serious losses if everything does not go according to plan.

A conservative investor who is building a portfolio for the long term should not engage in trading in the derivatives market at all. Or do it with a small part of your capital to feel like a real trader and catch the stock market adrenaline.

Participants in futures transactions can be both speculative investors who want to make money on changes in the price of an asset, and producers/suppliers of real goods. It was the latter who were the founders of fixed-term contracts. For example, today we agreed on the price of raw materials that we planned to purchase in the future. This way they managed to protect themselves from shortages, rises or falls in market prices.

How to buy futures

Futures purchasing mechanism:

1. Futures trading is carried out on the derivatives market. As a rule, when opening a brokerage account, the broker provides access to the stock, derivatives and foreign exchange markets.
2. It is necessary to deposit money into the account, indicating the type of market when transferring.
3. Select a fixed-term contract from the available list. Before this, you need to carefully study the specifications of the instruments you are interested in, which will contain basic information: contract type, lot, settlement price, execution date, etc.
4. Submit a purchase request, indicating the number of lots and price. One of the advantages of futures is that you do not have to immediately pay the entire cost of the contract, only part of it (guarantee obligation).
5. Wait for the order to be executed, record profit or loss.

The procedure itself is no different from trading ordinary securities (stocks and bonds). There is no need to wait for the contract to be fulfilled. This is a regular exchange instrument that can be bought and sold as many times as you like.

At the end of the trading day, the exchange charges a variation margin on the futures - the difference between the purchase/sale price and the closing price, which is credited to the investor's account. The financial result of the transaction consists of all accruals made during the billing period.

If we look at the list of available futures contracts, for example, on the Moscow Exchange, we will see that there can be several futures for the same underlying asset. They differ in the execution date and settlement price. At the same time, each of the futures differs from the market value of the underlying asset. Let's look at the example of Gazprom shares:

There are 4 contracts available as of August 28, 2022. There are 100 shares in 1 lot. The market value of the asset on the same date is 184.29 rubles. per share. As the contract execution time approaches, the futures price approaches the market price of the underlying asset.

This can be seen in the screenshot above. The nearest execution date is September 17. The cost of the contract is 18,459 rubles. or 184.59 rub. per share. The difference in prices is explained by the fact that the market price is set at the current moment under the influence of supply and demand, while the futures price is based on expectations - this is always a forecast value that depends on various factors (political, economic, natural, etc.).

Differences between futures and stocks

The underlying asset in a futures contract is often stocks. Let me remind you that a share is a security that gives its owner certain rights. But these rights do not apply to a fixed-term contract.

Let's look at the differences between stocks and futures:

With proper risk management, futures can become an instrument that can bring significantly more profit than stocks. It has its advantages, which for some are sufficient to engage in risky forward transactions.

Basic tool parameters

The main parameters of the instrument are described in the specification issued by the exchange before the futures go into circulation. Let's look at it in more detail using the example of a contract for preferred shares of Sberbank.

Let's look at the tool parameters.

• Short name and ticker (code by which the asset is traded on the exchange)

They encrypt the name of the asset, month and year of contract execution. In our example, 12.20 is December 2022. It’s more complicated with the code SPZ0. Z is December, 0 is 2022. Each month has its own letter: January (F), February (G), March (H), April (J), May (K), June (M), July (N), August (Q), September (U) , October (V), November (X), December (Z).

• Contract type

There are:

1. Deliverable – on the settlement date, the buyer is obligated to purchase the underlying asset. In our example, this is a lot (100 shares) of Sberbank. The brokerage account will reflect that you have become the owner of the bank's shares.
2. Settlement – ​​the execution of the contract is expressed in money. If you make a profit, money will be credited to your account. If there is a loss, money will be debited from the account. You will not own any shares. For example, a futures contract on a stock index will always be settlement only, because physically you will not be able to purchase or sell this index. But shares on the Moscow Exchange are included in delivery contracts.

• Last day of application

The day when you can still buy and sell contracts.

• Execution date

The day on which profit or loss is recorded under a settlement agreement, assets are bought/sold on a delivery basis.

• Warranty obligation and date of its establishment

The margin is the amount you must pay when purchasing a futures contract. It is not a constant value and is regularly recalculated by the exchange depending on the market price of the contract.

Advantages and disadvantages

Like any investment instrument, futures have their advantages and disadvantages. Each investor evaluates them independently and decides on practical application.

Advantages:

1. Minimum entry threshold. Due to the existence of a guarantee obligation, you can have significantly less money in your account than you would have to spend to purchase the asset in the usual way.
2. Fees are lower than when purchasing traditionally. For example, you do not have to pay a depositary commission for storing information about the owners of securities.
3. An investor cannot physically buy oil, gas, grain, coffee and other commodity assets. Through futures, he has access to commodity markets, which allows him to better diversify his investment portfolio.
4. The rules of the game are described in detail in the specification. The participant in the transaction only needs to indicate the number of lots and the price at which he wants to buy or sell the contract.

Flaws:

1. High risk instrument. Trading on forecasts leaves too many chances to lose everything. An indicative example is negative prices for futures with execution in April 2022. The contracts were deliverable, which means that many traders were faced with the need to buy physical oil. I am sure that there were few people who wanted to receive a barrel of black gold.
2. Difficult to understand tool. A beginner should only open a position after special preparation and try to make money.
3. The instrument cannot be used as a long-term instrument to generate passive income.
4. There are no advantages compared to owning company shares (participation in management, dividends).

Conclusion

After the spring collapse of the oil market, many experts started talking about canceling or significantly changing the mechanism of the futures transaction. It is possible that big changes are coming, because no one has ever encountered the current situation before. Wait and see.

Gerchik & Co is your reliable Forex broker with favorable trading conditions

Gerchik & Co is a broker with which every trader can make money, regardless of his starting capital, experience and knowledge. Everything here is thought out to the smallest detail so that both experienced professionals and beginners taking their first steps in trading can profit in the financial market. Here are the top 5 advantages of trading with Gerchik & Co:

1. Large selection of market assets. Currencies, cryptocurrencies, stocks, indices, precious metals, commodities - trade what you like and what best suits your strategy. You can almost feel like you're on the futures exchange!

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3. Honest market quotes. Unlike “kitchens” that process client transactions within the company, Forex broker Gerchik & Co displays each trading order on the interbank market, allowing the trader to trade in the most transparent conditions.

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Types of conversion operations

All of them are usually divided into 2 main types:

• current (spot deals);
• urgent (forward operations).

Instant (spot) transactions prevail in the foreign market. According to international practice, such contracts are dated directly on the day of conclusion of the agreement (the actual moment of receipt of money in the current account). As a rule, no later than two days after the execution of contractual obligations.

If the finances appear on the counterparty’s account on the same date when the agreement is signed, a tod-operation takes place (today). In the case of a later transfer of funds, they operate with a different name - tom-deal (tomorrow). Such conditions are ideal for participants in the business process. During the allotted period of time, they manage to complete the required payment documentation and process the available papers.

MARINE BANK employees provide support to foreign trade participants and advise on currency control issues.

In our country, taking into account the specific features of settlement activities, the second type of transactions is most common. The purchase and sale of monetary units is carried out in accordance with the optimal exchange rate. The most widely used pair in conversion operations on customer accounts is the dollar-ruble.

Due to time differences between the United States and the Russian Federation, execution in tom and tod modes is preferred. After all, most of our banking organizations are open until 18:00-21:00. And due to the eight-hour difference, even payments made late in the evening are processed by foreign colleagues long before their institutions open.

Unlike spot transactions, forward transactions are carried out only two business days after the agreement is finalized. Sometimes the period of time before the receipt of money from the counterparty’s account stretches for years. But generally the process takes from 1 to 6 months. Settlement operations are carried out according to established quotes.

Such transactions, as a rule, involve generating income from the difference in the cost of purchasing and selling currency. But they often turn out to be quite a risky undertaking. The exchange rate is unstable, and it is impossible to predict its growth or decline with accuracy. In this connection, most financial organizations try to protect themselves when performing forward operations. They introduce various protective mechanisms (for example, they put forward requirements for guaranteed execution in the form of depositing a certain amount).

Separately, it should be noted that when making transfers and receiving funds in different currencies, the resident must go through a control procedure. Which is stipulated by the law of the Russian Federation. Services of this kind are provided to its clients by SEA BANK. With us, compliance with currency legislation will not become a problem. Debiting or crediting money will be carried out in a strictly specified manner under our supervision.