Futures

What is the futures market?

If we want to describe the ideal investment market, it would end up looking much like the futures market. This is because:

• for any tradeable product there is a strong demand (very liquid)
• the manager or the owner can’t influence the price of the product
• the price of products fluctuate enough for there to be an earning potential
• any product can be constantly bought and sold (much longer opening times than for stock market)

The buyer promises when signing a futures contract to buy a certain quantity of the good at the pre-agreed price. And the seller is obliged to sell the product according to the above details. There are many products on the futures market, for which there is always high demand and liquidity (wheat, gold, oil, etc). On this market the regulated currency-pairs are also traded, such as the dollar, the pound, the euro, the yen for wich there is immense demand and in the current mood of investment their volatility creates an opportunity for earning on a day-to-day basis. The futures market offers some further facilities to investors:

Leverage

Futures trading is conducted on one of the most efficient markets of the world. This is provided by a tool called leverage. With this a smaller investor may realize a bigger profit than on any other market in the world. Still, it is notable that leverage can also result in huge losses. The investor has to place a margin and does not need to hold the entire value of the contract.

Volatility

It is the fluctuation of a rate. This is the second attribute of the futures market that makes it attractive to trade on. The volatility of futures in general is so great that it creates an opportunity for considerable profit. There is no need to sit and wait for months.

Trading times

Most of the futures markets can be traded on 24 hours a day. It is easy to open or close a position, it may be done by a simple click. This investor-friendly atmosphere resulted in the ten-fold increase of the future market contracts.

Information

On the futures market it is not quarterly reports (thus it is free from manipulation by management), but demand fluctuations that determine the price of the tradeables. Data moving the market usually comes from governments, national banks, so they are easily accessible. One of the most important information providers is the US Department of Agriculture, which regularly reports the change in demand for agricultural goods, the expected total cropping area planted and product volumes. The other range of important information for the futures market is macroeconomic data, which typically comes from the reports and statements of national bureaus of statistics and national banks.

Necessary investment capital

Naturally we need money for trading. More explicitly, we need enough money to be able to stay on the market on the longer term. Trading experience shows, that $10,000-30,000 is enough to get started up. Starting capital basically influences what products we can trade, how much risk we can take and even the duration of products we can buy. Almost every trader experiences the series phenomenon. 3 to 10 trades in a sequence are successful or unsuccessful. If someone can not finance a series of losses they will not have a chance to compensate with a winning series. Thus it is not prudent to over-strain our account and only to take up positions to a maximum of 70% of our total deposits.

Investor cycles

Due to the characteristics of the market, the fluctuation of the number of investors can be high.  The acquisition of investor strategies and its increase is normally in line with the number of successful trades the investor makes and obviously with the expansion of his capital.

Someone appearing on the market with savings typically moves his money into Investment Fund Units, which provides a moderate increase and requires no experience. On the other hand many investors want to see more of how the funds operate, or reqire higher returns and find themselves speedily on the stock market.  Small investors spend 2-3 very interesting years on this market, before they get to know the advantages of options and futures markets. The ones who acquire the necessary knowledge for these markets might stay as long as 5-7 years.

Expiry

Every product on the futures market has a precise expiry, that is the day and hour when the product can last be traded. Exact expiry dates are set by the market authority and are disclosed in the contract discription. As the expiry approaches the traffic and liquidity of a futures porducts are loaded onto the next expiry date. If the position is not closed by the expiry date, a forced closure takes place based on the closing price.

Contract

To make futures trading effective a basic unit stucture had to be created, as there used to be extreme differences in the volumes of contacts traded. To be able to determine the prices objectively, the minimum volume traded and the minimal quality conditions had to be set. In the process the products on the futures markets were standardized and the trading units were given the name ’contract’. The contract specifies what the buying and selling parties agree to trade and for what expiry. Thus the identity of the trader became irrelevant, as since the standardisation there is a homogeneous product with set quantities. In the current system you can trade futures simply and reliably.

Mr. László Szarvadi
phone : +36 1 269-78-11/201    
email: laszlo.szarvadi@hbe.hu