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Learn how to invest in the futures market

Learn how to invest in the futures market

Learn how to invest in the futures market
A futures contract is a contract between a buyer and a seller under which the latter agrees to deliver an underlying commodity / instrument to the former on a specified date at a specified price.

Investment room . Although few companies are trading futures, investors like George Soros have made fortunes trading with them.

This is a varied and exciting market that will allow you to trade contracts from corn and wheat to interest rates and stock indices. It will not be subject to a single sector of the global economy or to periods of economic strength. Thus, you can make money not only when prices go up, but also when they go down.

A futures contract is a contract between a buyer and a seller under which the latter agrees to deliver an underlying commodity / instrument to the former on a specified date at a specified price.

Between both parties they create futures contracts. At first you may find it odd if you are used to trading in company-issued securities that determine the number of shares available.

Futures are slightly different from equities, as while the number of stocks available is limited, the number of futures contracts you can buy is infinite as long as there are two that want to trade them.

Futures and CFDs . Futures are similar to CFDs (contracts for difference) because each has its origin in the union of buyer and seller to create it. Futures markets track all contracts that are created and classify the result as "volume".

The latter tells how many have been created for each available raw material during each trading period. For example, if you looked at the crude oil for January 2013 and saw a volume of 90,000, you know that this amount has been created for the contract that expires on that date.

The volume can give you a lot of insight into what's going on with a contract and how many people operate it, but it doesn't give you a global picture as this doesn't always stem from operators opening new deals. A part is generated by those who are involved in a transaction and are willing to go out.

They have to create a new contract with a view to offsetting the previous position. For example, imagine that there are four participants in this scenario: Buyer A, Seller A, Buyer B, and Seller B.

Buyer A wants to purchase 10 crude oil futures contracts by January 2013. To do this, he needs to find someone who wants to sell them. And this is the case, since Seller A wants to do it and enter into the negotiation. Both agree and create them so that there is a correspondence between them.

Buyer A is willing to exit this crude trade because he has already made a considerable profit. For this, you do not go to Seller A and tell them that you want to, but it would be tedious and complicated and you may not want to buy them back.

To exit, Buyer A has to create new contracts to offset current ones. Since you purchased them to enter the trade, you must now sell them. In other words, you must become Seller B.

He wants to get rid of 10 crude oil futures contracts for January 2013 so he needs to find someone who wants to buy them for him. And so it is, since Buyer B wishes to do so. They agree and create them so that there is a correspondence between the two.

At this point, Buyer A can offset his contracts with himself for equivalence. With this, he completely leaves the negotiation. This allows Seller A and Buyer B to coincide in an active negotiation.

In the first operation, they created 10 new contracts and, in the second, another 10 more. With all this, the volume would have doubled, and consequently the total volume would be 20.

But, as we mentioned earlier, the volume doesn't tell the full story, as Buyer A has offset his positions, and thus only 10 contracts remain in play.

"Open interest" designates the number of existing live contracts and reports the amount that has been created and has not yet been settled or cleared. As a futures trader, you want to know not only how many new ones there are, but also how many continue to exist.

A high volume and high open interest are signs of good liquidity in the market, so it should be very easy for you to quickly enter and exit your own negotiations at a good price and vice versa.

Buyer and seller price . Futures contracts are quoted at two prices: buyer and seller. The first is the one to which they can be sold and the other is the one to which they can be bought. The buyer is always less than the seller, and the distance between the two is called the margin or spread.

When a contract is low in volume, this gap will be quite wide and vice versa. As a futures trader, you want it to be as small as possible.

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