When it comes to futures trading, many people think it’s a complex and risky endeavour best left to financial professionals. However, with a little knowledge and understanding, futures trading can be a great way for individuals to take control of their financial future. In this article, we’ll provide a brief overview of what futures trading is and how it works in Canada.
What is Futures Trading?
Futures trading is an agreement to buy or sell a commodity at a set price on a future date. Commodities can include anything from agricultural products like wheat and corn to precious metals like gold and silver, or even oil. Futures contracts are traded on exchanges like the Toronto Stock Exchange (TSX) or the Montreal Exchange.
When you trade futures, you’re speculating on the future price movement of the underlying commodity. For example, let’s say you believe that the price of crude oil will increase in the next year. You could buy a crude oil futures contract with the intention of selling it at a higher price when the contract expires. If the price of oil does indeed increase as you predicted, you would make a profit. However, if the price decreases, you would incur a loss.
It’s important to note that when you trade futures, you don’t actually own the underlying commodity—you’re simply speculating on its price movement. Because of this, futures trading is considered a derivatives market.
How Futures Trading Works in Canada
In Canada, all futures contracts must be cleared through Canadian Derivatives Clearing Corporation (CDCC). The CDCC is responsible for ensuring that both buyers and sellers meet their obligations under the terms of the contract. They also act as an intermediary between buyers and sellers in case one party defaults on their obligations.
When you trade futures, you’ll need to put down a margin deposit with your broker. This deposit is typically between 5-15% of the total value of the contract and acts as collateral in case your position goes against you. For example, if you’re buying a contract worth $10,000 and your broker requires a 10% margin deposit, you’ll need to put down $1,000 as collateral. If the value of your position falls below this amount, your broker may request additional funds (a margin call) to cover their losses.
It’s also important to understand that because futures contracts are standardized products traded on exchanges, there is always someone willing to take the opposite side of your trade. So even if you think the price of crude oil is going to fall in the next year, you can still profit by selling crude oil futures contracts short.
Futures trading can be a great way for individuals to take control of their financial future—but it’s not without risk. Before getting started in futures trading, it’s important to have a solid understanding of how it works and what factors can affect commodity prices.
This includes learning about the different types of futures contracts, how margin works, and what types of news can trigger price changes. Additionally, it’s important to understand the basics of technical analysis and charting so that you can identify potential trading opportunities.