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Futures trading – do the research

Futures trading – according to the ASX, futures are contracts to buy or sell a particular and asset on a particular date in the future. This might include shares, currency or commodities for delivery at a later date.  

1. Where futures are traded

The different types of futures traded on the ASX include the ASX SPI 200 Index Futures, the S&P/ASX 200 A-REIT Index Futures, the S&P/ASX 200 Index Futures and the S&P/ASX 50 Index Futures.

Each morning on the news, you may hear the newsreader report that futures were up or down. This can be an indicator for where the stock market may be headed that day.

Interestingly, Craig James from CommSec said recently “movements in the US share market no doubt shape the futures market pricing”. He explained in July that as from the beginning of the year to then, the correlation between changes in the overnight share price index futures contract and the physical index on the following day was at 94 per cent.

2. What futures provide

But what is an ASX Index Future?

“ASX Index Futures provide you with exposure to an index's movement for a limited period of time,” the ASX says. “You can use futures as part of a strategy integrated with your share investments, or in isolation.”

The ASX says trading futures may allow you to get exposure to either the broad share market or a particular sector; “hedge a physical position”; trade in a declining market; and attain leveraged returns.

They are mostly traded by institutions such as fund managers to “protect a domestic equity portfolio from short term market falls” and to take a trading view on which way the market is going to head.

3. Even more futures

Other types of futures include interest rate futures, which allow exposure to short and long-term interest rates in Australia and New Zealand. There are also Grain Futures, which track markets for Australian wheat, feed barley, sorghum and canola. Also in the agriculture sector are Wool Futures. And there are also futures in the energy sector.  

4. Research before settling on futures

Futures can be traded on a stand-alone basis, or as a part of an investment strategy. Of course, before you delve into the world of futures, it is important to do your research. Read up as much as you can about these products in books and check out

Like any investment, there are a number of risks of which investors need to be aware. Consider speaking with an independent and trusted financial planner to help explain the pros and cons of such an investment.

It is crucial you are prepared when it comes to futures trading. Remember that not all brokers can deal in futures – brokers require a futures brokers’ license. It is crucial you are prepared when it comes to futures trading.

What’s the difference between discount internet brokers and full-service brokers? Find out here.

And keep hearing about CFDs? Find out what they are and how they can help – or hinder – your investment portfolio.

Plus, what are the risks of borrowing to buy stocks? Find out here.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, October 25, 2010

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