Grim examples of the 2008 recession and the Wolf of Wallstreet aside, it is well known that hedge investments offer opportunities for huge profits. The average futures trader in the United States makes over $200,000 annually. With the right knowledge and a little dedication, what is stopping you from making some extra cash on the side?
While futures and options trading has the potential for incredible profits, they just as easily can result in major losses. If you’re considering trading derivatives, you’ll want to know what you’re getting into. Continue reading to learn how to get started in the market.
What Are Futures
Futures are a type of contract in which a buyer agrees to purchase a specific number of shares from a seller at a scheduled time in the future for a set price. These contracts are traded and regulated by the stock exchange or the clearinghouse that settles trades on the exchange. This ensures that both parties are obligated to fulfill their end of the deal.
Futures are helpful to protect consumers from volatile market prices. Regardless of the price swing in the future of the commodity future contract, the buyer knows exactly what they are paying. This also helps sellers ensure a steady market for their products.
While not intended, this provides an opportunity for investment. Those that speculate on the future price of a commodity may sign a contract knowing a future price increase. This results in a contract more valuable than originally agreed upon, and the investor earning money.
What Are Options
Options work similarly to futures in that a future price is agreed upon between the buyer and seller. However, these types of agreements give the buyer and seller the right but not the obligation to act upon the agreed-upon price. This makes option trades substantially safer for investors.
Options are evaluated in two different ways. As with futures, options have an intrinsic difference between market and contract price. However, the value can decrease with time if the buyer or seller does not take an action.
Trading Futures and Options
Trading these derivatives is a simple task, although new investors should always exercise caution. Futures and options are traded on a futures market, a space specifically designated for trading these types of derivatives. There are benefits of doing this on your own, but a safer option involves working with a futures broker.
These types of trades are highly advanced, so a good way to garner experience in futures and options is with paper trading accounts. These allow you to practice trading with paper money to get a hand on the strategies required to trade accurately. Starting with a paper trading account will help protect you from major losses in capital.
More Investment Opportunities
Trading futures and options come with inherent risks, but enough knowledge and practice can offer a substantial investment opportunity. The above information will help you grasp the basics of futures and options, but there is more to know.
For additional learning and other investment opportunities, check out our Investing section.