What is futures?How to conduct futures transactions?

futures, English is Futures It literally means “future”, which specifically refers to the exchanges between the spot in the future, that is, when the transaction is not traded in the same time, it is timely to exchange the physical and money exchanges.Instead, it is agreed that at a certain time in the future, trading and selling at the current agreed price.

Futures transactions have high risk and high leverage characteristics, which may lead to rapid large profit or losses.If you have no systematic learning and cognition for the futures market, please do not conduct futures transactions.

For modern people, it seems that it is more linked to financial products.But in fact, the purpose of futures was originally invented to serve and stabilize the prices of industrial products and agricultural products to serve the people’s lives.

After that, with the booming of the financial industry, investors realized that the original futures trading model of the real thing can also be applied to the financial sector.After thatWhat is the uniqueness of the transaction?

Directory of this article

How does futures work?
How does futures develop?
What are the types of futures?
What are the characteristics of futures transactions?
How to buy futures?
What is the risk of trading futures?
What are the differences between futures and options?
More investment strategies

How does futures work?

Futures contract is a legal agreement, where the buyers and sellers agree to buy and sell specific quantitative quantities and quality assets at a specific date in the future.

Its operation process is: the objects (goods or financial instruments) that determine the transaction between the buyers and sellers, the time for transaction to deal with, and the price at the time of redemption will submit the contract to the guarantor, and the buyer submits the deposit.Perform the contract content, pay money.

A futures contract will definitely include the following content:

Basic asset: This is the actual commodity or financial instrument involved in the contract, such as wheat, crude oil, gold or the S & P 500 index.
Contract size: This specifies the number of assets of the transaction.For example, standard crude oil futures contracts cover 1,000 barrels of crude oil.
Delivery date: This is the date when the contract expires and must execute the delivery (that is, the buyers and sellers exchange assets and money).
Place: Especially for physical products, the contract will specify the place of delivery.
price: This is the price of both parties agreeing to trading basic assets.This price is determined when the contract is signed and applied during the delivery.
Margin requirements: Futures transactions usually require a certain percentage of the contract (for example, 5%to 10%) contract value as a deposit to ensure the contract performance.
standardization: Futures contracts are standardized, which means that except for the price and quantity, all contract terms (such as the date of delivery, contract size and quality specifications) are fixed.

The profit or loss of futures transactions is mainly based on changes in contract prices.When traders buy (more) or sell (short) a futures contract, they predict the price trend of the contract in the future.

Buy (do more): If traders predict that the price of a certain asset will rise, they may buy futures contracts.If the price rises, they can sell contracts at a higher price to make profits.On the contrary, if the price falls, it will cause losses when selling.
Selling (short): If traders predict the price will fall, they may sell futures contracts.If the price falls, they can buy a turnover at a lower price to make a profit.If the price rises, you will lose money when buying a round.

Futures transactions usually require traders to submit a deposit, which is a security deposit to ensure the performance of the contract.Two types of margin::

Initial deposit: This is the funds that must be deposited when opening the position, usually a small part of the contract value (such as 5%~ 10%);
Maintain a deposit: This is the minimum capital level required to maintain an open position.If the account funds fall below this level, traders must deposit more funds, which is called “additional margin”.

If traders’ account funds are lower than maintaining the deposit level and they fail to add bonds in time, the broker may execute forcibly liquidation.This means that the brokerage will automatically close the market in the market, regardless of the current market price.Forcibly liquidation aims to reduce the risk of further losses and ensure the liquidity of the market and the integrity of transactions.

How does futures develop?

The initial model was to make a commitment to the two parts of the transaction.

Later, with the expansion of the scope of transactions and the increase in transaction volume, the verbal promise became no longer credible under the substantial price change, so it was necessary to sign a written contract.

Later, the intervention of a third party was required as a guarantor.At the same time, the concept of “security deposit” was proposed to ensure that when the contract expires, the two parties will buy and sell in accordance with the contract.At this time, the contract is called “long-term contract”.The purpose of the “long-term contract” is to prevent abnormal price fluctuations, which mainly signed futures contracts for industrial and agricultural physical products.In 1571, the first long-term contract exchange, the Royal Exchange, was established in London in 1571.

With the large-scale use of “long-term contracts”, holding contracts in the environment of great fluctuations in prices has also become a way to benefit.

As a result, 82 merchants established the Chicago Futures Exchange in 1848 to provide information on all parties for investors and launch a standardized contract “futures contract” in 1865 to replace the “long-term contract” and allow the contract to turn on the contract.And optimize the margin system, forming a futures market that specializes in standardized contracts for buying and selling.

Subsequently, with the rise of the financial field, the subject matter of the “futures contract” expanded from the original physical objects to some non-physical transactions such as stock indexes, foreign exchange, interest rates, etc.

In the futures trading in the investment field, there are sets, or they are called hedges.By buying and selling futures, locking profits and costs, reducing the price fluctuations brought by time; the other is the arbitrage, or itThrough futures transactions, we hope that benefits will be made in price fluctuations and will bear more risks of relative to nippers.

What are the types of futures?

Futures are divided into different things according to the subject matter:: Commodity futures and Financial futures

1.Commodity futures

Commodity futures are a contract in the financial market, which allows traders to buy and sell certain products at a scheduled price at a specific date in the future.These contracts are standardized and include specific quantities, quality, and place of delivery.

Commodity futures transactions are mainly carried out on special futures exchanges, such as the Chicago Commodity Exchange (CME Group) and the London Metal Exchange (LME).

Commodity futures cover a wide range of products, which can be roughly divided into the following categories:

energy: Crude oil, natural gas, gasoline, fuel, etc.
Metal: Including precious metals (gold, silver), and basic metals (copper, aluminum, zinc, nickel, etc.);
Agricultural product: Soy, wheat, corn, cotton, natural rubber, palm oil, coffee, etc.;
Animal husbandry products: Such as living beef, thin pigs, etc.;
Chemical Products: Methanol, low-density polyethylene LLDPE, polypropylene PP, etc.

2.Financial futures

Financial futures are a financial derivative.It is a standardized contract about financial instruments or financial indexes.These contracts trades at the agreed price in a specific date in the future.

Unlike commodity futures, unlike physical goods (such as agricultural products, energy, or metals), financial futures are based on financial assets, such as currency, bonds or stock indexes.

Stock index futures

Stock index futures, English is Index FUTURES, or Stock Index Futures, refers to the stock price index, such as the Standards Poor 500 Index, the Nasdaq 100 Index, or the Dow Jones Industrial Average, as a financial futures contract for the contract.The value of the contract is determined by the stock price index multiplied by the pre-prepared unit amount.

The essential significance of stock index futures is that investors will transfer the expected risk of the entire stock market price index to the futures market.The transaction content is the stock index.Neither the seller nor the buyer holds the actual stock.

Investors can buy and sell the entire stock index at a certain price through these contracts in a specific date.

The following is the most common stock index futures in the United States:

S & P 500 stock index futures: Stock index futures contract with the Standard Purcera 500 index as the subject matter.S & P 500 INDEX is a stock index that tracks 500 listed companies in the United States.500 shares include 400 industrial stocks, 20 transportation industry stocks, 40 public utilities stocks and 40 financial industry stocks.Trading on the Chicago Commercial Exchange.
Nasdaq stock index futures: Stock index futures contract with the Nasdaq index as the target.The stocks include all new technology industries.The Nasdaq Index Futures is the world’s first stock index futures to adopt electronic trading methods.
Dow Jones Stock Index Futures: The full name is the Dow Jones Industrial Average Futures Contract.Its futures contract is the Dow Jones Industrial Average.The abbreviation is DJIA.It was announced by Dow Jones in 1896 and currently includes 30 component stocks.

Interest rate futures

Interest rate futures are a financial futures contract, and their value is based on specific interest rate products.These futures contracts usually involve government bonds or other fixed income securities, enabling traders to hedge or speculate on interest rate changes.

The basic assets of interest rate futures are usually government bonds or interest rate tools.When you purchase interest rate futures, you are actually agreed to buy or sell the basic interest rate tools at a specific price at a specific date in the future.This way enables investors to protect themselves from the impact of interest rate fluctuations, or profit from the predicted interest rate changes.

Common interest rate futures summary is as follows:

US Treasury Futures: These are futures contracts based on short-term (such as 2 years, 5 years), medium-term (such as 10 years) and long-term (such as 30 years) issued by the US government.For example, 10 -year US Treasury Futures is a very active market.
European Treasury Futures: Futures based on German government bonds.
Euro dollar futures(Eurodollar Futures): These are futures contracts based on US dollar deposits deposit in overseas banks and are one of the most active interest rate futures contracts in the world.
Short-term interest rate futures(SHORT-TERM Interest Rate Futures, Stir Futures): For example, a 3-month futures based on the British Libor (London Interbank Dipping Rate).

Foreign exchange

Foreign exchange futures are financial derivatives.It is a standardized contract that allows traders to buy and sell specific foreign currencies with a predetermined exchange rate at a specific date in the future.

These contracts are traded on special futures exchanges, such as CME Group.

In foreign exchange futures contracts, the buyer promises to purchase a certain amount of currency of a certain number of quantities in the agreed exchange rate in the future, and the seller promises to sell the currency in accordance with the same terms.These contracts are standardized and have a fixed date, amount and delivery conditions.

Common foreign exchange futures are listed as follows:

Euro/USD (EUR/USD) futures: The exchange rate based on the euro and the US dollar is one of the most popular foreign exchange futures.
Jen/USD (JPY/USD) futures: Exchange rate based on yen and dollar.
British pound/USD (GBP/USD) futures: Exchange rate based on British and US dollars.
Australian dollar/USD (AUD/USD) futures: Exchange rate based on the Australian dollar and the US dollar.
Canadian dollar/USD (CAD/USD) futures: Exchange rates based on the Canadian dollar and the US dollar.
Swiss franc/USD (CHF/USD) futures: Agreement based on Swiss franc and the US dollar.

What are the characteristics of futures transactions?

Standardized contract: Futures contracts are highly standardized, which means that the size of the contract, the date of delivery, and the minimum price fluctuations are all pre-set.This standardization makes futures contracts easy to trade on the exchange.
Daily settlement: The number of transactions on the day is unlimited, which allows investors to get a timely profit and loss, and immediately decide to add or stop loss without waiting to be settled after the suspension.In comparison, the settlement of stock transactions generally adopts T+2 mode;
Time constraint: Based on the development of the “long-term contract” model, futures transactions have “expiration date”, and they must be delivered before or on the day of the expiration date, otherwise they will be forcibly liquidated or delivered by the exchange;
Lex trading: Futures transactions adopt a margin system.When investing, only 5%to 10%of the deposit of the turnover can be paid by 100%transactions.As a result, the proportion of profit and loss is amplified in the same proportion.trade;
Diverse assets: The futures market includes a variety of assets, including agricultural products, metals, energy, currency and financial instruments (such as stock index and interest rate futures).
Short short is more flexible: The short-term trading of futures transactions does not need to be borrowed first and then returned.Traders can directly sell futures contracts, even if they do not actually hold the contract.The short futures contract can end the transaction by buying a liquidation, or in some cases through cash settlement or physical delivery.

How to buy futures?

Purchasing futures contracts usually need to pass a special futures broker or a comprehensive broker providing futures transaction services.

Here are some well-known brokers:

CME Group (CME Group): Although not a direct broker, CME Group is the world’s largest futures and options market, and many brokers provide transactions through this platform.
Interactive brokers: Suitable for high-level and professional traders, provide extensive trading tools and low costs.
Charles SCHWAB: Provide futures trading services through the TD American TD American.Schwab is known for its customer service and powerful research tools.
E*trade: Acquired by Morgan Stanley, providing futures trading services, and is known for its easy-to-use platforms and tools.
Fidelity Investments: It is mainly based on stocks and other investment products, but also provides futures transactions.

What is the risk of trading futures?

Futures trading high risk As well as High income It is known that leverage trading models are the main reasons for its risks.

Take a simpler example.

The futures price of cotton is 10,000 yuan/ton, and investors buy a 5 -ton cotton futures contract (total value of 50,000 yuan).Investors submit a 10%security deposit (5,000 yuan) to buy assets worth 50,000 yuan.

If the value of cotton futures increases by 1,000 yuan (futures price is 11,000 yuan/ton), the increase ratio is 10%.If investors decide to sell, the income is 5,000 yuan (55,000-50,000), and the profit ratio reaches 100%.

In other words, the futures price rose 10%, but the profit ratio reached 100%, and the leverage was 10 times.

On the contrary, if the value of cotton futures fell by 1,000 yuan on the day, the decline was 10%.At this time, investors lost 5,000 yuan and the loss ratio was 100%.At this time, if you want to continue to hold cotton futures contracts, you must re-add a deposit immediately.

It can be seen that the leverage trading model and margin system of futures transactions allow futures investment to participate in investment in the form of “small bloggers”, and its risk ratio is much larger than stocks.

What are the differences between futures and options?

Futures contract (Futures) It is a legal agreement.Both buyers and sellers agree to trade certain assets at a predetermined price in a certain date.

Options(Options) Gives buyers (holders) the right to purchase or sale (seeing optional rights) assets at a specific price or before at a specific price or before, but not an obligation.

1.Rights and obligations

For futures contracts, both buyers and sellers are obliged to pay assets with agreed prices at a specific date in the future.

Objective contracts only give buyers’ rights and choose the right, that is, at any time before the contract expires, they can choose whether to exercise options.This is a right, but not an obligation.The option seller has no rights, but must bear the obligation to fulfill the contract.If options buyers choose to exercise options, the seller must fulfill the delivery commitment.As a compensation for accepting obligations, the option seller collects rights at the beginning of the contract.

2.Risk exposure

The risk of profit and loss in the futures transactions is unlimited.

In options transactions, the profit of options buyers may have no upper limit, and losses only end to option fees; the profit of the options seller is at most the rights fee, and the loss may be unlimited.

3.Margin

Both trading and seller of futures transactions must pay the deposit.

In options transactions, options buyers do not need to pay the deposit.The option fees (or rights) they pay are their biggest losses.This fee is paid at one time when purchasing options, and there is no other payment obligation.The option seller needs to pay the deposit because they face potential unknown losses.

4.Set up value preservation

Hedging is a risk management strategy to reduce potential financial losses due to price fluctuations

This usually involves the use of derivatives, such as futures, options, or swap contracts to hedge the current or expected risk exposure.

Regardless of the use of futures or options to preserve the hedging, the purpose is to reduce the effects of uncertainty and protect investors from disappointing price changes.

Futures set period preservation

In the futures market, the hedging preservation usually involves buying or selling futures contracts to protect existing assets or assets expected to be purchased from price fluctuations.

The purpose is to hedge price risk to ensure the stability of future prices.It can reduce the impact of the price fluctuations of the spot market, especially for products or assets that have a greater impact on seasonal and market volatility.

For example, a farmer is worried that the price of corn during the harvest may sell corn futures contracts in the futures market in advance to lock the current price.

Set up options and options preservation

Protect the existing investment from disadvantaged price changes by buying a bullish or declining options.

For example, a stock investor is worried about the market decline and may buy the corresponding amount of options as protection.If the stock price fell and the option appreciation, it offset part of the loss of stock investment.