The Basics of Market Futures Trading

Trading in the financial markets involves buying and selling options on the underlying assets, known as market futures. The underlying asset is the price itself. When you make a purchase, you are in fact buying the right to buy or sell at a later date for a pre-determined amount. If for some reason the market rises, you will profit from the difference between the purchase price and the current market price.

To get the best out of your futures contracts, there are a few things you should know and consider. First, since the underlying assets are always in physical form, the exchange is done via physical location – usually a stock exchange. You can choose to trade futures either online or through your brokerage firm. Online trading has the benefits of lower fees and commissions, whereas trading through a broker usually offer higher discounts on both the equity index futures contracts you purchase and the futures contracts themselves.

Most equity index futures contracts are traded on a futures exchange. The contracts, also known as forward contracts, are bought at the strike price and held until the next expiration month. If the contract is held to its full maturity, then the buyer of the contract will gain the full value of the contract. Contracts held at the next expiration are known as open futures contracts. The main advantage to holding these contracts is that you are not required to pay the tax on them until the profits are realized.

In order to exercise the option of a future purchase, you have to pay the expenses that go towards purchasing it: the market cost per contract, margin, and commission. The market cost is the contract’s price minus the exercise margin which are the upfront payment you pay to the broker before the sale. The margin is the initial payment you pay in the form of a cashier’s check or cash for deposit to the broker in the event you decide not to execute the contract. Commission is the fees and charges, the broker will charge you for executing the market futures contract.

An investor can exercise margin calls during the initial margin period, which is the pre-determined time limit for a specific buy. You can purchase a stock during this period for the same amount you had paid in order to purchase the contract and at a lesser price than the market price. A margin call will equal the difference between the selling price and the stock price. You must pay the broker before you can exercise a margin call. If the stock price moves below your initial margin requirement, you will not be able to sell the contract and will lose your investment.

There are two types of trading hours in U.S. equity index futures contracts. Market futures are usually traded in regular business hours. Most of the trading occurs during the market hours, since most of the contracts are purchased and sold during the regular business hours. When an investor decides to buy a futures contract, he pays the market price and receives the net cash value of the contract at the closing. The price of the contract is then compared with the price of the underlying asset on the market and the net asset value or return is determined.

Since most futures contracts are traded on U.S. exchanges, they are subject to the same risks as stocks traded on stock market exchanges. Since futures contracts are leveraged, losses may result because of changes in market prices. Traders may use margin to offset any losses they may suffer during the trading hours. However, if losses do occur during market hours, most brokers require that traders cover their positions in full before the market opens the next day.

Before opening a new futures trading account, you should obtain necessary licenses and be registered with the Department of Commerce. Your trading platform should offer you a choice of online trading. You should also have a general idea of what stock index futures trading is and how the market operates. It is not advisable to start trading futures contracts if you are unfamiliar with trading platforms, financial markets, or the laws surrounding futures trading. You should always conduct research on futures trading before you start trading to avoid losing money.