Futures Stock Trading Guide 2021: All you need to know about
Traders also invest their funds in stocks futures. Speculators such as swing traders, day traders, hedgers and position traders generally opt for stock futures trading. They mainly use futures as an instrument to hedge price shifts of underlying securities. These traders’ final goal is to mitigate the losses incurred from potentially adverse price shifts rather than harvesting massive gains. The other major benefit of trading stocks through futures is that you can short-sell stock without actually having the stock and you can further carry forward your trading position. Moreover, we cannot ignore that futures positions are leveraged, which means you can own relatively expensive and renowned stocks by spending little.
It must be clear from the points mentioned above that futures stock trading is advantageous for traders. But, What does this futures stock trading actually means? And How can you start futures stock trading? The article deals with all these questions.
Introduction futures stock trading
When you decide to sell or purchase a stock future, you are not simply selling or purchasing a stock certificate. It means that you are signing a stock futures agreement. It refers to a contract in which an individual agrees to sell or buy the stock certificate on a specific date at a certain price. It is slightly different from that of conventional stock trading. Here, you do not own the stock, not invited to the shareholder meeting, and not entitled to dividends. In conventional stock trading, you earn profit only when the price of your trade or stock surges. However, with futures stock trading, you can harvest profit even when the market price declines.
How to determine the price of futures stock?
When we talk about determining futures stock’s theoretical value, we simply mean calculating the price by summing up the cost of carrying and current spot price. However, in the practical world, the futures stock contract’s real price depends on the underlying stock’s supply and demand. Usually, the spot prices of underlying stocks are lower than that of the futures prices.
Future price = cost of carrying + spot price
Here, the cost of carrying the interest cost of the same trading position in the cash market.
How do stock futures work?
There are two trading positions in stock futures: short and long positions. The long position means that you agree to purchase the stock when the future agreement expires. The short position is the one where you agree to sell the stock when the futures contract expires. If you feel that the stock price you own will surge in the following three months, you can go long today on your trading position. If you feel that the stock price will decline in the following three months, you can go short today on your trading position.
Do you know what is more interesting about selling and purchasing futures agreements? Here, you need to pay just a percentage or portion of the contract’s entire price with futures stocks. It is known as purchasing on margin. The margin can lie anywhere between 10 to 20 per cent of the total price of the agreement. You get leverage or margin from the financial service provider. One of the best brokers you can opt for is Global TradeATF providing maximum leverage of 1:500 on trades.
However, while purchasing on margin, you should keep this particular point in your mind that a stock brokerage firm could claim a margin call. They do this when your total investment’s value goes below a predetermined level, also known as the maintenance level. A margin call is simply an additional amount you require to pay to your financial service provider to upgrade the futures agreement’s value to meet the maintenance level.
What is the difference between futures stock trading and Option stock trading?
In options stock trading, the buyer of options has the sole right and is not obliged to sell or purchase the underlying stock on the expiry date. Whereas in case of futures stock trading, both seller and purchaser are obliged to sell/purchase the underlying stock at the time of expiry. The risk-return profile is asymmetric in case of single stock options. In contrast, stock futures payoff is symmetric. Moreover, stock options’ price is influenced by the underlying stock’s price and the underlying stock’s volatility. But, in the case of stock futures, the underlying stock price is the only factor affecting stocks’ price.
How to settle stock futures?
Currently, the method to settle down your stock futures is through cash. The final settlement price refers to the closing price of the underlying asset or stock in this case.
Understanding pairing stocks
This trading technique refers to holding a trading position on the comparative performance of two stocks. It is fulfilled by purchasing futures on those stocks which are anticipated to perform well and selling futures on those stocks which are expected to perform poorly. The net loss of profit lies in the comparative performance of two stocks.
How to start futures stock trading?
To start futures stock trading, you need to open an online trading account with the broker. The steps for opening an account are provided below. You just require to spend your five valuable minutes on starting trading in the stock market.
1) Visit the official website of the broker. Kindly check the URL of the website to stay away from online trading frauds.
2) Get yourself registered by signing up. The information needed for this include name, last name, country, email id and phone number for verification.
3) Once you enter the OTP verification number, you will be redirected to the documentation session. Here, you upload the required documents including address proof, identity proof and baking and financial statements, not older than three months. It is a piece of advice to keep these documents ready beforehand.
4) Choose the stock which you wish to trade and deposit the amount for the same.
5) Once the formalities, as mentioned, are fulfilled, you can start trading.
Now, the bigger question must be striking your mind: Which are some ideal platforms for trading? To solve your query, we have listed renowned financial service providers that will surely enhance your trading standards and fulfil your trading expectations.
1) T1markets
It is an authentic well-regulated firm working under the Cyprus Securities and Exchange Commission guidelines. The minimum deposit and maximum leverage offered by the broker are $250 and 1:400, respectively.
2) Global TradeATF
The firm established in the year 2013. TradeATF is not a scam broker as IFSC regulates it. The broker provides trading through MetaTrader 4 and undertakes the minimum deposit of $250.
The Bottom Line
The main benefit of futures stock trading is that you can take advantage of market-price shifts from either side. High margin allows you to hold larger positions by paying a percentage of the total amount. But, if the condition turns against your expectations, it can lead to huge losses. So, analysts always suggest that those traders who have a high-risk appetite should go with futures and options trading. But, that too after building a strong trading foundation. The educational courses of ROinvesting can help you out.
