Are Futures too risky for the Average Investor?
Only you can decide whether you have the risk tolerance for futures and whether they are a financially suitable investment for you. A disciplined approach to the market can reduce risk and increase the potential for profit. For a self-directed futures trader, this means doing your homework upfront to create a plan for your trading, and a plan for each trade, then executing your plan. Futures are a highly leveraged investment; leverage is where both the potential for risk and the potential for gain lie with futures. Having an awareness of and respect for leverage is the basis for controlling risk in futures trading.
How do you sell something you don't own?
A futures contract represents the commitment to either sell or buy an asset at a future date. You don’t need to own the underlying commodity or financial instrument in the intervening period; you are merely contracting to deliver it at a specified future date. As long as you offset your position before expiration, you needn’t worry about having to own the commodity to deliver it.
What is Margin and how does a margin call work?
The margin required to buy or sell a futures contract is solely a deposit of good faith money that can be drawn on by your brokerage firm to satisfy your obligation if you lose and ensure that you receive your profits when you win. There are two margin-related terms you should know: Initial margin and maintenance margin. Initial margin (sometimes called original margin) is the sum of money that the customer must deposit with the brokerage firm for each futures contract to be bought or sold. On any day that profits accrue on your open positions, the profits will be added to the balance in your margin account. On any day losses accrue, the losses will be deducted from the balance in your margin account. If and when the funds remaining available in your margin account are reduced by losses to below a certain level—known as the maintenance margin requirement—your broker will require that you deposit additional funds to bring the account back to the level of the initial margin. Or, you may also be asked for an additional margin if the exchange or your brokerage firm raises its margin requirements. Requests for additional margin are known as margin calls.
For example, that the initial margin needed to buy or sell a particular futures contract is 2,000PKR and that the maintenance margin requirement is 1,500PKR. Should losses on open positions reduce the funds remaining in your trading account to, say, 1,400PKR (an amount less than the maintenance requirement), you will receive a margin call for the 600PKR needed to restore your account to 2,000PKR. A margin call is a serious issue. Because of the leverage involved, margin calls in futures trading require immediate attention. A margin call may be met either by adding funds to your account to bring your account balance back up to the margin requirement or by liquidating positions to reduce your margin requirement.
Who holds my funds in a Futures account?
Funds for commodity trading can only be held by a Futures Clearing Merchant; a firm authorized to conduct futures business with the public. Every firm that conducts business with the public as a Futures Commission Merchant must have and maintain sufficient capital to meet its financial obligations to its customers. These requirements are subject to continuous audits and stringent enforcement. Regulatory agencies have the authority to determine compliance on a daily basis. Firms and principals of firms in the futures industry are required to maintain their customers’ funds and margin deposits in bank accounts which are totally separate from their own. Rules further stipulate that such funds can be used only for the purposes the customers intended and can at no time be commingled with the firm’s funds or the funds of the firm’s principals. This means that in the event of the bankruptcy of an FCM, the FCM’s creditors cannot claim customer funds to satisfy the demands of creditors.
How much do I need to deposit to fund a futures trading account?
This is an individual decision, based on your financial situation and risk tolerance. Many reputable studies consider 10% to 20% of your total investment portfolio to be a reasonable guideline for how much you may want to put toward futures. Whatever amount you decide to start with, it should be risk capital.
What is Risk Capital?
Risk capital is the amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle. Only risk capital should be used to fund a futures account; not your mortgage payment or your children’s college tuition. In the context of opening with risk capital, futures trading generally isn’t an endeavor to begin on a shoestring. It “takes money to make money” in futures. If you don’t feel you have sufficient capital to begin, you might consider waiting and saving up money to be able to start when adequately funded. The markets will always be there and a properly funded account will improve your odds of success.
Do all Futures Contracts ends with a delivery of somthing?
NO, futures are rarely used to complete an actual delivery transaction. In fact, fewer than two percent of all futures contracts traded end in delivery. This is because offsetting a trade frees the trader from any contractual obligation for delivery.
How can I withdraw funds form my account?
As long as your funds are not needed to margin a position, or are in long option value, they are always available to the account holder. Generally, you can have funds sent to you no later than the following business day.
How can I track performance in my account?
If you’re trading on a trading platform, your profit and loss are generally available in real-time through the platform. Even if you’re not trading on a platform, clearing firms generally allow you to access your account information online.