What Is Futures Trading?
Futures trading is a type of agreement to buy or sell an agreed volume of stock, security, or commodity at a predetermined date in the future. Unlike options trading, futures contracts carry legal binding. A buyer or seller must fulfill the deed either through the cash settlement or physical delivery of an underlying asset.
There are two main strategies of futures trading, including speculation and hedging. Tradeable assets, such as commodities, currencies, metals, and cryptocurrencies, frequently change in value due to different socioeconomic factors. Futures contracts enable traders to lock the prices of underlying assets to limit a loss or confirm a profit. While hedgers mainly look to diversify a potential risk with future contracts, speculators seek profit-making opportunities via futures trading.
How Do Futures Brokers Work?
Like forex trading, futures trading also involves a broker and trading platform. Also, traders have to fund their accounts to start placing trades. Not to mention, fulfilling the KYC requirement is the prerequisite for any trading.
While traders have the option to trade different types of futures, including currency, commodity, and indexes, we’ll stick to currency futures to keep things simple to understand.
Currency futures are usually traded on exchanges. After a client initiates an order to sell or buy a contract of currency futures, the futures broker passes it to different businesses for execution. It is common among traders to use margin accounts for trading futures. However, a cash account can also work fine. For a cash base account, investors might need to have enough funds to buy future contracts. On the other hand, margin account holders borrow money from brokers for trade execution.
Given below is a simple example showing how currency futures work.
Suppose you buy ten futures contracts of Euro (EUR) – €120,000 per contract at 0.90 US$/€. If the price per contract moves from 0.90 to 0.95 US$/€ by the end of the day, then the profit you make may be calculated as follows:
(0.95 US$/€ – 0.90 US$/€) x €120,000 x 10 = 60,000 US$
There are three categories of futures brokers, including full service, discount, and deep discount futures brokers. Given below is a quick overview of each type of broker.
1) Full-Service Broker
A full-service broker comes with a wide range of resources and round-the-clock customized support. A full-service broker offers different trading services under one roof, including professional advice, disposal of an advanced research facility, and ease of order placement. This type of broker is well suited for all kinds of traders, including individuals or institutional investors. Not to mention, the cost of trading with a full-service broker can be a little high as compared to other classes of brokers.
2) Discount Broker
Discount brokers are relatively more popular amongst traders due to low trading costs and commission charges. These brokers are well suited for investors who prefer to trade independently. As compared to full-service brokers, services offered by discount brokers may differ. For instance, clients can initiate orders independently. Secondly, the discount brokers don’t provide personal recommendations. Lastly, research and analysis of the market is the responsibility of clients. However, some discount brokers have also started offering customized trading solutions to their clients in recent years.
3) Deep discount brokers
Featuring competitive prices and all-time market accessibility, deep discount brokers are a preferred choice of high-volume traders. While the technology has advanced over the years, enabling clients to place orders in the market without having an intermediary involved, deep discount brokers render services for a minimal cost.
How to choose the best futures brokers?
Given below are some tips that can help you find the best futures brokers.
A regulated broker is relatively more secure than a non-regulated one. Besides the security of funds, factors such as an abundance of liquidity, transparent pricing, and legal protection make regulated brokers a better choice to consider. Therefore, before signing up with a broker, do not forget to check if it is regulated.
A good futures broker offers easy-to-use trading platforms having all basic and advanced trading tools and indicators available. It is crucial to check if the trading platform of your prospective broker suits your trading needs. Most importantly, check if it allows hedging since a trading platform restricted for hedging isn’t worth futures trading.
Futures trading involves frequent fund injections since you usually buy multiple future contracts. Therefore, an instant deposit facility is a must. Also, check how long does your prospective broker takes to process your withdrawal request. Ideally, a broker should not take more than 24 hours to release your funds. However, withdrawals processed through wire transfers are an exception.
Considering customer support an integral part of an organization’s success, good futures brokers pay special attention to customer facilitation. You should communicate with the customer support staff of your prospective broker and raise your concerns and queries with it. It can be the best tool to assess the professional competence of a broker.
Best Futures Brokers – Our Recommendations
Exness – One of the best future trading brokers in the world
eToro – It offers a wide range of futures products
XM – It offers excellent trading conditions under one roof.
Interactive Brokers – It is best for both novice and veteran traders
Forex.com – It has a competitive pricing structure
IG Markets – It offers customer-friendly trading platforms
How did we select the best future brokers?
Considering our moral duty to exercise maximum precautions while selecting the best futures brokers, we consider the following factors;
Regulation: We have confirmed the regulation status of all our listed brokers. After finding the company registration number of each broker from their website, we verified it on the concerned authority’s website.
Reputation: Ranging from customer feedback to personal recommendations and the broker ratings, we ensured to check every nook and corner to confirm the positive reputation of our listed brokers.
Trading Platform: Our listed brokers offer the best trading conditions along with easy-to-use trading platforms suitable for both hedging and speculation purposes. Our trading experts have personally used the trading platforms provided by all of our listed brokers and found them very effective.
Can Futures brokers be Trusted?
Yes, future brokers can be trusted, provided that they are well regulated. Signing up with a non-regulated broker is quite risky. The worst part is that you can’t even file a case against a non-regulated broker if it breaches the code of conduct.
One of the best aspects of online futures trading is the diversity of futures brokers available to traders. However, clients must not forget to follow the guidelines shared above to stay protected from scammers.