Basics in Futures Trading

stock market chart

The futures market has a reputation for volatility that is only suitable for investors who have a high-risk tolerance. Compared to stocks and bonds, there is some truth in that assessment.

However, many people avoid it just because they do not have a solid understanding of many aspects of it. For instance, futures contracts in industries like soybeans, gold, crude oil, and many more started at or below ground level. The short-term and long-term performances of futures markets are indicators of how things affect consumers around the world, like how much gasoline would cost if you were planning to go on a road trip.

If you are interested in learning more about the futures markets and maybe in trading futures down the road, you have to lay out a foundation of knowledge. Let’s start with some basic questions.

What Is a Futures Contract?

A futures contract is a standardized legal agreement to sell or buy a specific commodity or asset on a predetermined date or a during a specified month in the future. Futures contracts are usually traded on electronic exchanges like CME Group, which is the biggest future exchange in the United States.

A “standardized” contract means it is effectively interchangeable. It contains specific details including:

– The asset’s price per unit and the minimum fluctuation in price, also called tick size
– The quantity and quality of the asset
– The date and place for the physical delivery of the asset. Note that in reality, actual delivery seldom occurs because most contracts are cashed out before the asset’s delivery date.

Here is an example. A corn futures contract with 4,000 bushels traded on CME Group in November 2017. The price was quoted in dollars per bushel, and a delivery date was specified in the contract. A futures contract in crude oil included 1,000 barrels of oil. The price was quoted in dollars and cents per barrel.

One of the best places to learn about the history of the futures market in the United States is at the website USA Futures.

Who Are the Traders in Futures Contracts, and What Are Their Reasons for Trading?

Traders in futures come from all backgrounds. The market is quite active. The robust activity from all brings high liquidity to the market. This makes the trading and business environment easier for everyone involved.

The original traders are producers and processors of commodities. Think of oil, precious metals, and grain. Then came the speculators like large banks, hedge funds, and retail and individual traders whose livelihood is trading in futures.

Players in the futures market have their reasons for trading. A grain processor who expects an exceptionally dry summer in the Midwest farm states might want to trade as a hedge against potential price increases in certain agricultural commodities.

Speculators might want to make a quick profit by buying low and selling high. Taking advantage of the futures contract price fluctuations is similar to timing the equities markets. Speculators monitor how the price moves, then take action at the opportune time to realize a profit.

Commercial traders and speculators are key components in keeping the futures markets liquid. The high number of eager sellers and buyers keeps the markets active. This is not much different from the equities and bond markets.

What Is the History and Evolution of Futures?

The first futures contracts can be traced back to the early 17th-century rice markets in Japan. However, the futures trading that the West is familiar with started around 1852 when the Chicago Board of Trade (CBOT) was created by a group of grain merchants.

Shortly after CBOT was formed, they created the first documented “forward” contract for 2,000 bushels of corn. This laid the groundwork for the current futures contract. Over the past 10 years, CBOT and other exchanges were acquired by CME Group.

Why did Chicago become the birthplace of futures contracts? The reason is due to the city’s geographic location. It is right in the center of the country’s agricultural industry. So, it was a convenient location for sellers and buyers to meet and trade.

Farmers would take to the market their livestock and crops that they had grown and raised to sell them to commercial buyers.

There were many risks for both the buyers and sellers. Buyers risk receiving products that are below standard. If the past growing season was poor, they might not get any product at all if not enough was produced.

Buyers needed an assurance that the quality and quantity of a commodity they want would be available when they require it. Sellers, typically farmers, need an assurance that there are buyers for their massive amounts of crops, or else they would be out of business.

Categories of Futures Orders

At the center of futures trading order. So, to make good trade decisions, it is important to understand the different types of orders.

Market Order: This is a basic type of order with instructions for the broker on buying and selling at the best price available. Market orders execute almost right away, and they are considered the quickest method of getting in or out of a trade.

Limit Order: This is an order with instructions to sell or buy a futures contract at a certain price or better. There is no guarantee that a limit order will be filled. It lets the trader set a price so they do not suffer any price slippage.

Stop Market Order: This order executes a market order when a set price, called the stop price, is reached. When the stop price is reached, the stop market order turns into a market order and will execute at the best price.

Stop Limit Order: This is like a stop market order with the exception that when the stop price is reached, a limit order is executed. It still does not guarantee that it will be filled, but it does give you more control of the price range where the order will execute.

What Are Futures Roll Dates?

Futures contracts do expire. They are active only for a certain amount of time. Throughout the year, each futures market has its sequence of events as the contract expires. Before expiration, traders can choose to exit their active position or roll their contract over to a later date. This essentially extends the contract’s expiration period.

Futures contracts also must result in one of the following: either the asset is physically delivered to the buyer, or the contract is cashed-out. When it is settled by cash, a credit or debit is issued. For physically delivered contracts, the trader must produce or take delivery of the commodity when the contract expires. Although this is an option for traders, most of the time, traders close or roll over their positions to avoid futures delivery.

Tax Efficient Gold Investing

many dollar bills

Let us talk about gold. It is a shiny metal that can be melted quickly into bars, coins, or jewelry. It is resistant to rust, corrosion, or other forms of decay, making it a unique treasure. In addition, we show why gold is valuable in our eyes and the world economy as a store of wealth and medium of exchange.

We show why silver ranks a distant second to gold and why copper comes third despite sharing many similar physical attributes with gold. Read on to find answers to these questions and more information.

Gold’s Important Dichotomy

As many people know, gold is valuable because it makes unique and attractive jewelry and currency coins and is a profitable investment. However, we would like to include another essential quality of gold, which is challenging to identify but exists in reality – the mystery of gold. Part of the reason many people demand gold is the mystery of its appeal.

By any measure, the word “mystery” is not commonly used in the finance and investment sector. Nonetheless, it is as factual in finance and investments as in art, science, and other disciplines, including mystery itself.

Main Points

In the following sections, we study gold’s position in our economy; we dissect why gold is valuable and its role in a diversified investment portfolio.

According to experts, recent times have seen gold become the best option in alternative investments because it can withstand financial failure and preserve an investor’s wealth against inflation associated with the fiat currency.

We will show you the opportunities and risks of investing in gold and the best strategies to earn quick profits when day-trading gold in the commodities market. We also discuss factors influencing gold prices and the process of owning gold using a brokerage account.

Gold As an Investment Asset

Before we join the gold investment campaign, we need to check the excitement about gold and, from the beginning, look at some of the reasons why investing in gold has some significant considerations.

The main concern with gold is that it cannot be consumed or exhausted like other commodities like oil or wheat. After mining, all gold remains in the world. In contrast, an oil barrel is converted into gas and other products used in your car or a jet engine. Likewise, grain products are eaten as food by humans and animals. However, we can only turn gold into a piece of art, jewelry, or other multiple uses or keep it safe in vaults. Irrespective of how we choose to use and store our gold, the chemical structure of gold as a precious metal cannot be altered or depleted – it is stable and long-lasting.

This means it is not entirely correct to subject gold to the principle of demand and supply as it applies to commodities such as oil and grain products. In short, the supply of gold will only increase as time passes, regardless of the demand for the precious metal.

One of the best ways to invest in gold is with a retirement savings account like a 401k or IRA.  A popular way to invest in physical gold and silver is to rollover an old 401k into a self-directed precious metals IRA.  If you are going to do this you want to be sure to not get a penalty when moving a 401k into gold.

History Overcomes the Supply Problem

Gold is the only commodity whose value has appealed to all human societies since recorded history. Because of gold and mercantilism, humankind has built and destroyed many empires and kingdoms. With the growth of economies, gold gained universal recognition as an acceptable form of payment. For a long time, history has accorded gold plenty of economic power and beauty beyond any other commodity on earth, and its value has never been wiped out.

For instance, until the 1970s, the US financial system was heavily built on the gold standard. Promoters of this standard claim that such a monetary system is the best for regulating credit growth and implementing controlled lending practices because the amount of loans depends on the physical availability of gold. Given the nearly three years of the credit crisis in the United States that led to the 2008 financial collapse, many may agree with this point.

From an essential point of view, gold investments are seen as a viable hedging method against inflation. Gold helps investors safeguard their wealth when currencies are falling.

How To Begin Investing in Gold

The stock market is the first place one needs to stop when looking for information on gold investments. The stock market enables individual investors to buy actual gold bullion or shares in companies that mine gold.

Note that buying stock in a gold-mining company has a more significant advantage than investing in gold bullion. This is because as gold prices go up, the gold-mining company realizes greater profits, increasing the company’s earnings dramatically. For instance, assume a mining company has a profit margin of $200 when the price of gold is $1000. When gold prices go up by 10% to $1100, the gold miner’s operating profit increases to $300, representing a 50% growth.

That is just an example based on general assumptions; there are other deliberations to make before buying stocks in a gold-mining company, like political risk (many gold-mining companies operate in developed countries) and the difficulty of sustaining gold production levels.

One of the most popular methods of investing in physical gold is via the SPDR’s Gold Shares (GLD) exchange-traded fund (ETF), the custodian of the gold. Before investing in ETFs, it is essential to determine the net asset value (NAV) to avoid a scenario where the purchase price is much higher than the NAV. Such scenarios occur when the markets are optimistic.

Considerations For Alternative Investments

Although gold is an excellent investment to hedge against inflation, it is not the only alternative. Generally, commodities draw benefits from inflation because they have pricing power. When investing in commodity-backed shares, the critical goal is to select the producer (s) with the lowest cost. Investors looking for low-risk investment opportunities are better off with inflation-protected securities such as TIPS. The only thing you should not do is allow your money (in cash form) to lie idle; you have to safeguard the value of your dollar from erosion by inflation.

What To Expect

There is no downplaying the significance of human thinking when investing in gold. Many people prefer to direct their investment funds to gold, mainly when there is market uncertainty and fear of economic recessions and depressions.

A Fresh Start

Worship God as a family with us every Sunday starting at 11am.

We gather for worship in the Charleston United Happy People Church Discipleship Center (2nd Floor).

What can you expect when you arrive?

When you arrive at our facilities you will find several buildings (simultaneous to the service in Spanish there are two services in English). Look for the signs that locate the Discipleship Center where the Service is held in Spanish. You may park in assigned areas or around the Church.

Happy People are full of human warmth. We seek through hospitable gestures that each person feels like a family. The welcoming atmosphere lends itself to building fraternity and praising God in good times and bad.

Every Sunday we start the service with Praises. Next we have the moment of The Word with a relevant message for daily life. Every fifteen days we celebrate happy days to commemorate the life, death and resurrection of Jesus Christ. Each service is accompanied by moments of Prayer and occasionally by Special Celebrations.