You’ve made wise financial decisions like putting your money into your 401(k), investing in mutual funds, buying bonds, procuring real estate, and purchasing shares in companies. Now, you’re probably thinking about additional ways to round out your portfolio. Stock market futures may be your ticket to bringing in more money and increasing your nest egg.
The only issue is that you aren’t sure about the ins and outs of stock market futures. And as a smart investor, you won’t put your money into anything unless you know it’s going to pan out for you.
If you want to start investing in stock market futures, but you’re looking for a little more information, here are five key facts to get you started.
1. Stock Market futures are Future Financial Obligations
Stock market futures, which are also referred to as market futures or equity index futures, are agreements (or futures contracts) to sell or purchase a commodity or underlying financial instrument on a certain future date for a specific price. Every futures contract will communicate how much of a commodity or financial instrument is being traded. For instance, each futures contract for crude oil is worth 1,000 barrels, which each one for corn is 5,000 bushels. A futures contract holder cannot back out early; he must uphold his contract until its end.
The buyer of the stock market futures holds the long position, and the seller holds the short position. These futures contracts are made on electronic exchanges around the globe.
If a buyer purchases a futures contract and the price of a commodity goes up, the futures contract buyer will make a profit. The way it works is the buyer will receive the product at the lower price and now has the ability to sell it at its current, higher worth. If the price were to decrease, the futures seller would make a profit, because he can buy it at the lower market price and sell it to the futures buyer for a higher price.
There is a lot of competition between buyers and sellers, and the market is very liquid. It is also riskier than simply investing in stocks. Sometimes, stock market futures contracts will require that the asset is delivered to the buyer. Others will denote that the buyer receives cash.
A majority of stock market futures investors are trading these futures in order to speculate and hedge risk. A company that produces metal could utilize stock market futures to lock in prices and decrease their risk, or a trader could use stock market futures to predict price movement and hopefully profit.
2. Stock Market FuturesAffect Tomorrow’s Prices
Stock market futures are critical to today’s global economy. Since the market functions on supply and demand of the futures contracts, it helps determine the prices of commodities. The prices of commodities are determined by global elements like economic instability of a region, the weather, refugee crises, deforestation, and debt default.
The futures market also helps with retail risk. Since the price is predetermined, traders know whether to buy or sell ahead of time, and there is less risk. Less risk translates to decreased chances that producers will raise prices on consumers.
For example, if you are a wheat producer and want to grow 500 bushels of wheat in the coming year, your options are to grow it and sell it at the future market price or use a futures contract to lock in a fixed price you will set it at after it’s harvested. If you secure a price now for the future, you may avoid financial failure because wheat demand may drop. But, if prices somehow rise, you will only get what your contract says. So, the wheat manufacturer is taking a risk either way. In one situation, he wins big, and in the other, he loses. It takes well-rounded research to determine whether or not you’re hedging your bets correctly.
3. Examples of stock Market Futures Commodities
There are many different types of stock market futures you can invest in. Some of the popular ones include oil, food, metals and natural gas.
When trading oil stock market futures, investors will look at the supply and demand of oil and political happenings in oil producing and purchasing regions. For example, if there is a revolution happening in the Middle East, and it’s predicted to lead to an upheaval in the country’s political leadership, that could affect the price of oil.
Food, especially wheat and corn, are huge in the world of stock market futures. When it comes to food, investors may look at environmental factors like hurricane and tornado season, which could wipe out farms and lead to higher prices. If traders purchased their stock market futures at a low price, they could sell for a much higher amount and significantly profit from the shortage.
Commodities trading resulted in higher distribution costs for food in 2008. What traders did was divert funds from the stock market, which was failing, into food commodities like wheat and corn. Then, they diverted investments into oil prices. The high price of food led to riots in some less-developed regions.
Natural gas is utilized to generate electricity and heat houses throughout the United States. The countries with the most natural gas reserves include Russia, Qatar, Iran, the United States, and Saudi Arabia. Elements that affect supply and demand in the natural gas market include economic growth in the region, storage levels, prices of competing fuels, and volume of exports and imports.
Metals like gold, aluminum, and copper are frequently traded through stock market futures. Since gold prices are an indicator of the U.S. economy, people often buy them when the economy is going through rough times. If more investors are buying gold, it could show that the economy is not doing well. This happened in 2011, when gold hit a record high of $1,895 an ounce. Even though there was no fluctuation in supply and demand, traders bid it up that high because of uncertainty.
4. What to Avoid with stock Market Futures
Though investing in stock market futures may be a good financial move for you, there are scams and bad practices you’ll want to steer clear of. For example, if the broker you’re dealing with is pressuring you to make a certain trade or charging you a huge commission, you’ll want to find someone who is legitimate. These are not ethical tactics.
You’ll also need to have a certain amount of capital in your account. It’s recommended that you start with at least $25,000 for trading. Also, avoid thinly traded markets. Futures markets with many active traders result in greater liquidity, and let you sell and buy faster and usually at a better price.
5. How to Invest in Stock Market Futures
If you want to get started with stock market futures trading, open a virtual account online and use paper money for practice. This way, you can see how accurate your bets are and whether or not you’re well suited for this kind of trading. Remember to keep your emotions in check, and to trade based on logic instead. With investing, there will always be times when you don’t make the right decision, but you can bounce back if you have the right knowledge and experience in your back pocket.
Once you’ve tested your trading skills with a simulator and you feel comfortable enough to use real funds, you’ll need to open an online account with a legitimate broker. Make sure you do your research on the broker and make sure they are verified by reliable sources like MarketWatch, NerdWallet, CNBC and The Wall Street Journal. The broker is going to ask you a series of questions, including what your net worth is and what experience you have with investing. The fees will vary based on the services the broker provides.
You’re going to need to stay on top of the news and the latest stock market futures advice to ensure you’re making the right bets. You can do that simply by subscribing to Fast Fortune Club, which is run by America’s number one pattern trader Tom Gentile. Receive updates in your inbox that will point you in the right direction and help you make stock market futures trades that’ll win big.
What are you waiting for? Subscribe to Fast Fortune Club today.