What are Futures?

Trading Futures contracts

Tracing their modern origins back to 1710 at the Dojima rice exchange in Osaka, Japan. Futures contracts were originally devised to be used to protect commodity producers against possible future price movements. More recently they have been adapted to financial products such as shares and share indices such as the SPI 200 here in Australia. Both commodity and financial futures are now widely used by short term traders and investors alike.

Key considerations:

  • Can be used to trade multiple asset classes such as Gold, Crude oil and Stock market indices
  • Futures prices do not directly follow the asset that they are based upon, they are their own market
  • Can be used to potentially profit from falling markets
  • 24 hour trading opportunities- easy access to global markets from a single account
  • Relatively low trading costs, with relatively high contract values and margin requirements (direct futures)
  • Can be traded using high leverage- increases risk and reward potential
  • Direct Futures contracts expire and are automatically closed-out, CFD Futures are not (most brokers)

In Australia, the most widely traded futures contact is the SPI 200. This Share-Price-Index contract follows the overall movement of the largest 200 companies on the Australian Stock Exchange (which make up approximately 87% of the entire market’s value).

The attraction of this contract, as with all index-contracts (indices), is that it allows the the potential to benefit from the overall performance of the market (whether it’s rising or falling) rather than having to find the best individual stocks within it. Additionally- most index contracts are highly liquid and trade almost 24 hours per day.

Since the inception of Contracts For Difference, many new & intermediate level traders now prefer to trade Futures via CFDs. Although the trading costs can be slightly higher- they are still extremely cost effective (no brokerage) and the minimum trade sizes are much smaller, which allows for better risk management, especially in smaller accounts.