If you’re an investor in Australia, you may be wondering if futures trading is a good option for you. In this article, we’ll look at the benefits of futures trading and explain why it’s such a popular investment choice in Australia. Stay tuned to learn more.
What is futures trading, and why is it beneficial for investors in Australia specifically?
Futures trading is an agreement to buy or sell an asset at a set price on a future date. The asset can be anything from gold and soybeans to currencies and stock indices. Futures contracts are traded on exchanges and standardized in terms of quality, quantity, and delivery date.
Investors use futures contracts to hedge against price fluctuations or speculate on the market’s future direction.
Futures trading benefits investors in Australia because it provides them access to a wide range of global markets. For example, Australian investors can trade futures contracts on the Chicago Mercantile Exchange (CME). This ability gives them exposure to U.S. markets, which can be volatile.
Futures trading also allows investors to exploit price discrepancies between different markets. For example, if the charts show gold prices are higher in Australia than in the U.S., Australian investors can buy gold futures contracts on the CME and sell them when they expire, pocketing the price difference.
How futures trading works and the different types of contracts that are available
Futures trading is a type of investment that involves speculating on the future price of a commodity or asset. Traders can buy or sell futures contracts and agreements to buy or sell an asset at a set price on a future date.
Futures contracts are traded on exchanges, and the prices are determined by supply and demand. The most common futures contracts are for commodities such as oil, gold, and wheat. However, futures contracts for stocks, bonds, and currencies exist.
Trading futures can be a risky investment, but it can also offer the potential for large profits. For example, if a trader believes that the price of gold will increase in the future, they may buy a gold futures contract. If the price of gold does indeed rise, the trader will make a profit. However, if the price falls, the trader will incur a loss.
Before deciding to trade futures, it is essential to understand the risks and potential rewards involved.
The benefits of futures trading
Futures trading is essential for managing risk, discovering prices, and diversifying portfolios.
By hedging against future price movements, futures traders can protect themselves from losses due to unexpected events. In addition, futures markets provide a crucial venue for price discovery, allowing buyers and sellers to come together and agree on a price for a particular commodity.
And finally, by including futures in their portfolios, investors can build a diversified portfolio that is less susceptible to changes in any market. Thus, futures trading offers many significant benefits that make it an essential part of the financial landscape.
The risks associated with futures trading and how to mitigate them
While this type of trading can be profitable, it also carries a particular risk.
The most common risks associated with futures trading include expiration, basis, and liquidity risks.
Expiration risk is the possibility that the underlying asset’s price will not be favorable at the time of the contract’s expiration.
Basis risk is when the price difference between the spot price and the futures price will widen beyond the trader’s expectations.
Liquidity risk is the risk that a trader cannot exit a position due to a lack of market participants.
While traders cannot eliminate these risks, there are strategies that traders can use to mitigate them. For example, traders can use stop-loss orders to limit their exposure to expiration and basis risk. They can also use limit orders to protect against liquidity risk.
By understanding and managing these risks, traders can increase their chances of success in the futures market.
All in all
Futures trading benefits investors in Australia because it allows them to hedge their investments, trade on margin, and gain exposure to different markets. Australian investors should consider futures trading to protect their portfolios and grow their wealth.
Suman(Kul Prasad) Pandit is a graduate from Tribhuvan University with four-year experience in corporate and start-up sectors in UK and USA. Being a responsible & sustainable business enthusiast he is dedicated to business education to solve problems in entrepreneurship and business growth.