How do Futures work? 

Since 2007 New Zealanders have had the opportunity of investing with a KiwiSaver Provider in order to accumulate money for their retirement. The companies people choose to take responsibility for their money, as they know how to invest to earn. It’s a good idea to enter into trading futures.

Trading futures is pretty straightforward. Each transaction consists of two parties, a seller offering a commodity, index, or currency at a fixed price and time in the future. A buyer has an opportunity of buying the assets after entering into an agreement. What’s important, the full price doesn’t have to be paid in advance, only the margin. The margin is set by the seller. 

It’s possible to invest in all types of assets, such as forex, commodities, interest rates, cryptocurrencies, or indices. It's based on speculating on the price of offered assets, aiming at benefiting from the price swings. If the price drops, the buyer takes advantage, while the seller loses money. The main issue with futures is that they are highly liquid.

The risks of trading futures

It is important for anyone interested in trading futures to know there are risks associated with it. What’s most important to know is that futures trading contracts have their expiration date, which means the assets cannot be sold or bought at the best possible price. 

As we already know, futures traders do not pay the whole amount in advance, but just its fraction called the margin. The amount of money that needs to be placed in the bank account to control the contract is defined by us as the margin. This is also the information for the traders their requirements can be met. 

The biggest risk of trading futures is connected to leverage, which gives the opportunity to start trading. There are different types of margins included in the contract. Yet, the maintenance margin states the money in the bank account to cover potential losses. It’s necessary in case the assets’ price changes when only the money on the account gives the certainty of the return to the original margin level. 

Margin calls will be registered if the customer's balance drops below the maintenance level. Reestablishing the initial margin requires paying this amount. Until then, the contract cannot be closed. Futures Traders cover all losses incurred by their clients.

Are futures worth investing in?

Investing in raw materials may surely be payable, for example taking about mining or agricultural businesses. Trading futures is somehow a way of freezing the prices of commodities. Yet, investing in futures is risky as it’s all connected to speculating about financial markets.

Bear in mind the prices agreed on with the seller may be lower in a month or two, yet you will pay the amount set. It’s the same with the producers, who may set too low margin, and when the expiration date comes, it will occur the margin should have been 10% higher. 

A big group of investors don’t intend to buy goods, they only speculate on goods. Up to the time of expiration date, the assets may be easily sold, and new ones may be bought. It’s a great option for sellers who trade a commodity they don’t really have but only speculate on the direction of the commodity market.