What is the futures market and how to trade?
Do you want to know what the futures market is? Then be sure to follow this guide!
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The futures market is a tool that can be used as a hedge. However, it can present some risks for investors, especially those with little experience.
To help you understand more about this subject, we have prepared a complete guide to the futures markets.
Read on to find out more!
What is the futures market?
The futures market is an environment in which assets are traded in the present with a settlement date in the future.
In other words, contracts represent a commitment to buy or sell an amount of a certain good on a set date and at a set price.
The underlying asset can be a commodity or a financial asset.
But it's important to remember that the futures market has some specific characteristics compared to other derivatives.
One of them is that negotiations always happen on the stock exchange. For this reason, one of the other characteristics is the homogeneity of the products.
In addition, contracts are adjusted daily. If you make a profit or loss, the account is adjusted on the same day.
Contracts always follow an established pattern so that investors can be sure they are trading the same asset.
It is important to mention that the futures market offers great opportunities for speculators, i.e. investors who want to increase their capital by taking advantage of market volatility.
But for this to happen in the best possible way, investors must keep up with the market, the economy and the main global trends, looking for indicators that will help in the decision-making process.
How to buy contracts on the futures market?
It's important to remember that you're not buying the asset itself, which is the bags, dollars and interest, but the contracts.
To invest in this type of contract, you will need a margin of guarantee, either in cash or assets.
The margin serves as a guarantee of payment in the event of negative market fluctuations.
Fixed-income assets, such as CDBs and government bonds, serve as a margin of guarantee.
The process is the same as buying shares. You enter the home broker and choose the contract you want to buy.
Understanding the codes of the Futures Market
Products are identified by a three-letter code. After the code comes the expiration month. Finally, there are two digits representing the year of expiry.
See the codes of the main products traded on the futures market:
| Contract | Code |
| Cattle | BGI |
| Corn | CCM |
| Arabica coffee | ICF |
| S&P 500 Index | ISP |
| Dollar | DOL |
| Minidollar | WDO |
| Ibovespa | IND |
| Mini index | WIN |
To understand the due dates, see the table with the months and their respective codes.
| Due date | Lyrics |
| January | F |
| February | G |
| March | H |
| April | J |
| May | K |
| June | M |
| July | N |
| August | Q |
| September | U |
| October | V |
| November | X |
| December | Z |
The year of the product is added at the end. Example: BGIH18 which is a fat cattle contract that expired in March 2018.
What is the main purpose of the futures market?
The futures market aims to protect producers and investors from asset volatility.
However, it is also often used by speculators who are looking to make a profit.
Hedge
Hedge means "exchange rate protection".
This operation can be compared to insurance, i.e. the investor pays to reduce the impact of a possible price change in the future.
For a transaction to be classified as a hedge, it must be preceded or followed by a transaction with the same commodity in the same physical, but in an inverse position.
Arbitration
The purpose of this technique is to take advantage of the difference in the price of an asset.
In short, an asset will be bought in a cheaper place so that it can be sold in a more valuable place, either upfront or in the future.
Generally, the price differential used by arbitrageurs to carry out their operations is very low. For this reason, profits arise through the quantity and volume of operations.
Speculation
The speculator is the economic agent whose main objective is to make a profit.
Unlike hedgers, their trades are not made in search of protection.
The speculator therefore wants to profit from the difference between the buying and selling price.
This individual takes high risks with the expectation of receiving higher returns.
How to start investing in the futures market?
To invest in the futures market, you need to open an account with a stock broker.
So you need to have access to the home broker.
It is also important to understanding the codes to identify the product you want to invest in.
To increase your chances of winning, you need to choose a good broker that guarantees good rates and market assistance.
The futures market allows you to operate with leverage, which basically means investing beyond your capacity.
But to do this, you need to have an amount that serves as a guarantee in case your operation makes a loss.
Remember that trading with leverage presents certain risks. In fact, it's a good opportunity to negotiate higher values. However, it's money you don't have.
What are the advantages of investing in the futures market?
Among the main advantages of trading futures contracts, we can mention the possibility of earning income from the wide variation in prices that this investment has.
Although it's risky, it's lucrative and attractive.
The futures market is full of advantages for those who are willing to understand it.
Another advantage is liquidity, since an investment can quickly turn into cash in your current account and be available for use.
In addition, there is a wide variety of assets and indices to invest in, making it possible to invest in different markets.
Conclusion
Now you know what the futures market is and that it is an option for diversifying your investments, especially if you are looking for liquidity.
So if the futures market fits your investor profile, this product is a great choice!
However, it is important to mention that futures are an asset that requires knowledge of the market and a good tolerance for the risks involved.
