Why Trade Futures

Why Trade Futures

Futures are a type of derivative financial instrument that derive their value from an underlying asset. The most common underlying assets include commodities, indexes, and currencies. Futures contracts are standardized so that they can be traded on futures exchanges.

While trading in the U.S. stock market is most active from 9:30 a.m. to 4:00 p.m. ET, stock index futures trade nearly 24/7. (see image below)

futures schedule

The rise or fall in index futures outside of normal market hours is often used as an indication of whether the stock market will open higher or lower the next day.

Futures have two main uses in investing: hedging and speculation.

Hedging is a risk management technique that seeks to offset potential losses from price changes in the underlying asset. For example, if a company is worried about the price of crude oil rising, it could purchase a futures contract to lock in a lower price for oil in the future.

Speculation is the act of taking on a risky investment in hopes of making a profit. For example, a trader might believe that the price of gold is going to increase, so they purchase a gold futures contract. If the price of gold does indeed rise, the trader will make a profit. However, if the price of gold falls, the trader will incur a loss.

Futures can be used to trade a variety of different assets, including commodities, indexes, and currencies. Futures contracts are standardized so that they can be traded on futures exchanges. This makes them accessible to both institutional and individual investors.

Futures offer a high degree of leverage, which means that investors can control a large amount of the underlying asset with a relatively small amount of capital. This can lead to large profits, but it also means that losses can be magnified.

Futures are complex financial instruments and require a certain amount of knowledge and experience to trade them effectively. Before trading futures, it is important to understand the risks involved and to consult with a financial advisor.