Trading Futures

To start trading futures, you have to provide a deposit which is known as a margin. This provides collateral to the exchange against the possibility that you don’t meet the contract. The amount varies, depending on what is being traded and how much it typically fluctuates, but it may be about 10%.

The other thing to know about futures is that the price is updated each day, which is called marking to market. However much the value has changed in the day, that amount is reflected in your margin account. If the price has fallen, the money will be taken out of your account. If your account falls below a certain level because of this, then you may get a ‘margin call’ to put more money in, again to make sure that the market is covered against you failing to meet the contract. Basically you’re paying for losses in the contract as you go along.

It’s very important that you answer the margin call straight away, because otherwise the broker is entitled to liquidate any of your holdings you have with him in order to pay it. It could even be an unrelated stockholding, and you can’t hold him responsible for any losses you sustain.

Of course, marking to market can also work in your favor. If the value of the contract goes up, then your account is credited. So, unlike stocks, you can make a profit without having to sell any of your holding.

As each futures contract has a date associated with it, called the delivery date or expiration date, you can’t just sit back as you can with a stock investment. You need to have a plan to trade, usually selling the contract, hopefully for a higher price, before the expiration. Some dealers will allow you to roll over the money into another contract with a later date.

Just one more thing, the exchanges impose a limit on how much the price can vary each day. This is because futures can be very volatile and the exchange needs to keep some order in the markets. If a commodity repeatedly closes ‘limit up’, going as far as allowed each day, then they can change the limits temporary to let the price find a better level, but this doesn’t happen often.

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