Recently futures trading have been gaining momentum in Indian stock market as it provides higher returns within a short period of time. Many investors are now ready to take up higher risks in order to get better returns. The concept of futures trading involves mainly two people and producers are one of them. The producers will enter into an agreement with a dealer wherein they commit to deliver specified amount of a specified commodity at a specified price during a specified period of time which is in the future. The list of commodities is an exhaustive one and includes grains, cattle, coffee, tea, metals, gold, platinum, and silver and so on.
The most important advantage of the futures trading is that is allows trading for both the small investors as well as big investors. The investment in such contracts can be very small amount or you could leverage it to higher levels depending upon your money availability and risk bearing capacity. The futures contract gives the share in a specified commodity and more important is that you do not hold the physical stock of the specified commodities. This relieves you from the warehouse and other overhead expenses.
The traders in futures contract will be holding only 10% of the total value of the contract. But still the traders must understand their money margin and then plan their investment. They must have the sufficient amount to cover up the margin required for the futures contract. Because just like any other investment the future contract is also prone to many market risks. So if you have taken a position then the market may at time go against your position which will require you to give money to the broker.
One best way is to make use of the stop loss orders wherein the trader can give a price range in order to protect their already earned profits. If the price depletes further the broker will no longer trade for you beyond that price level specified by you. When trading in commodities never invest in one single item. Diversification is the essence of any kind of investment. Choose different categories of commodities and park your investment in different segment. This way your portfolio will be diversified as well your risk will also be spread out. Even if there is decrease in price of one of the commodities the increase in price of another will offset it automatically. At the end of it your personal portfolio looks perfectly stable.
Before investing in futures contract makes sure you do the necessary homework. Futures trading can make you rich or bankrupt overnight. Be prudent in investing in the right commodities at the right time. For this you need to understand the market trend and also analyse the market indicators every commodity will be affected by the political and social factors as well. News updates and other web site reviews and expert reviews must be understood from time to time. Keep yourself updated with the latest information and base your investment decision on them.
Futures contract is something wherein the buyer is expecting a future price rise in the commodity so that he could sell off the commodity in future for a profit margin. So the past historical data and performance data cannot be the only thing that will determine your investment. As you get a hang of the market then you will also be able to take better investment decisions.
If you feel that the price of a commodity is expected to rise in the future then you could benefit by buying them now at a lower price. In case the price increases as per your prediction then you stand to gain a large profit margin but if vice versa then your loss also will be substantial.
In case you feel that the price is going to decline in future then you will first sell the contract though you never hold one then after the price decreases you buy them at lower price. This is the main difference in buying and selling. In buying you first hold the stock and then dispose it off. But during a decreasing trend you first sell the stock and then buy after the price declines.