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Futures trading – betting on the future

Futures trading requires much research and it’s important to consider speaking with an independent financial planner before diving into this type of investment vehicle.

Futures are contracts to buy or sell an asset on a date in the future chosen by the investor.

1. How do futures work?

Futures traders bet on where they think the index they are investing in is headed.

“When you buy an Australian Securities Exchange (ASX) Index Future, you agree to 'buy' the index’s value underlying the futures contract on a specified date in the future,” says the ASX. “When you sell a future, you agree to 'sell' the index’s value at that time. At maturity of the contract, a cash settlement takes place. Whether you make a profit or loss at maturity depends on how the index has moved in the period since the futures contract was traded.”

2. Where futures are traded

At the ASX, futures are traded over three share market indices – the S&P/ASX 200 index, the ASX 200 A-REIT index and the S&P/ASX 50 index.

Through a number of companies, it’s also possible to trade overseas futures markets on indices such as the Nikkei or FTSE, currencies like the Australian dollar, the Euro or the Japanese yen, and commodities such as gold, oil and wheat, as well as interest rate futures.

When trading futures, it is possible to get exposure to the broad share market, or to a particular sector. You can also trade in declining markets.

3. Futures market as an indicator

Futures markets can also provide an indication of where daily markets may be headed on the day following.

“The futures market later tonight, early tomorrow, [might] say the Australian share market is up 10 points or 15 points. It’s amazing how accurate the futures market is as a barometer,” says CommSec Chief Economist, Craig James. “This means to say, doesn’t it matter if the company announcements are coming out, [and so on]? It seems as if we’re run by the program traders, by the robots, by the automaters.”

The morning news often mentions what happened on futures markets the night earlier.

4. Do your homework

Of course, there are many risks involved when it comes to futures trading. This is why it is important to read up as much as you can about them. It is vital to weigh up the pros and cons of futures in order to decide whether it would be a suitable investment for you to pursue.

5. Consider advice

Remember that brokers require a future brokers’ license to deal in futures. Before dealing with a broker, ensure they have the correct qualifications and licenses.

Consider speaking with an independent financial adviser who can help you ascertain whether or not this type of investment would be suitable for your needs. Ensure you understand what you are getting into before jumping into futures trading.

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Futures trading – betting on the future


Published on: Saturday, January 29, 2011

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