Many people know the stock market from trading stocks in the spot market.
However, this is not the only possibility to make money in the market, did you know?
The first step in this journey is to understand how the futures market works and to know its characteristics and risks.
What is futures market?
The futures market is an environment of the stock exchange where contracts are negotiated with prices determined for a future date.
Unlike the spot market, in which the settlement occurs in a few days, this market presents an expiration date for the contract.
Moreover, the settlement in the futures market is not physical, but financial.
That is, when the contract's expiration date arrives it is not necessary to deliver or receive what was negotiated.
The results are given in daily adjustments, being credited or debited according to the operator's position.
Because of these characteristics, we do not talk about the negotiation of assets in this market. The most appropriate term is financial derivatives.
How does it work?
If you have already made some investment or speculation in the spot market, you will find some differences when operating with future contracts.
- Leverage: In the futures market you are allowed to trade even if you do not have all the necessary capital. Leverage refers to the practice of trading with more volume than you have in cash;
- Margin of guarantee: Faced with the possibility of making an operation using leverage, the stock exchange requires that the participants provide guarantees with the brokers through which they perform the operations;
- Daily adjustment:To operate in the future market it is necessary to be aware of the daily adjustment system. Although the contracts have settlement at a later date, the gains and losses are daily realized through the daily adjustment of the participants' positions;
- Compulsory Liquidation:When verifying that the positions are daily readjusted you must be wondering: what if the person does not have the money to settle the daily adjustment? In this case, in addition to resorting to the collateral margin deposited, the brokerage house may compulsorily close the defaulter's position.
What are the advantages and risks involved?
In general, the main advantage of operating on the futures market is the possibility to speculate and increase your earnings even with little money.
However, it is necessary attention since the operations involve important risks and have particular characteristics, as you have seen.
Thus, speculative operations on the futures market and demand a lot of market knowledge.
