Best Futures Trading Platforms of 2023

Frequently Asked Questions

• Futures are legal contracts for the purchase or sale of a fixed amount of some good at a fixed time. While initially created for agricultural commodities such as wheat and corn, futures now exist on a wide range of commodities and financial products, such as grains, livestock, currencies, oil, gas, and interest rates. Futures contracts each have specified criteria for the quality and amount of the commodity underlying the contract, such as the delivery requirements, the time and nature of the delivery, and the minimum price increment. There are multiple delivery months available on futures contracts. Not all futures contracts have a physical delivery process, instead settling for cash at maturity; this is typically the case with financial futures, whereas agricultural products typically have physical delivery mechanisms.

  Another important component of futures is leverage, as only a small fraction of the overall value of a contract is required as margin to open a trade. Unlike margin for stocks, which is limited to 50% for overnight positions and involves the customer paying interest to the broker, margin for futures is the posting of funds set by exchanges to ensure that financial obligations on their positions will be honored. Margins on futures, which include initial and maintenance margins, are typically a significantly lower percentage of the overall value of the contract compared to trading equities. Similar to stocks traded on margin, futures positions will be stopped out by the broker or exchange if adequate margin is not maintained. Margin on futures, therefore, provides traders with even greater opportunity and risk, resulting in higher leveraged profits or losses on their positions.

• Futures are used for hedging and for speculating. Initially developed by farmers and food processors, futures allow producers to have greater control over the prices farmers receive or processors pay for their crops. Futures contracts represent obligations to buy or sell a certain amount of a commodity at a certain time for a certain price. Futures contracts, therefore, have fixed criteria regarding contract size, the quality and location of the item to be delivered, and when delivery will occur. 

  In addition to the producers and processors using futures contracts to reduce price risks, there are speculators that generally do not have a direct connection to the commodity being traded. Speculators are trading futures for profit, but not with the intention of taking delivery of the underlying commodity. Speculators help to add liquidity to the futures market. The futures market expands far beyond agricultural products now, with futures for energy, precious metals, and financial products such as currencies, interest rates, and equity indexes. Financial futures are also efficient hedging and speculating tools that can help traders manage risk in their stock and bond portfolios. For example, someone with a stock portfolio that does not want to sell stocks in their portfolio but believes the market may fall can choose to sell futures to hedge their portfolio rather than selling appreciated stock holdings that would subject them to paying capital gains on a long-term holding. 

• It is relatively easy to trade futures. The process is similar to opening a margin account for trading stocks. First, a customer chooses a broker to open a futures trading account. A futures trading account can be established with an existing broker that supports futures trading, or it can be opened with a different futures broker. The account opening process includes signing a margin agreement, having the account approved by the broker, and depositing money into the account. Some brokerage accounts require there to be several thousand dollars in the overall account before margin can be enabled.

• While there is significantly increased margin leverage in the futures markets compared to U.S. equities, it is best for futures traders to have more cash in their accounts than just the initial margin requirements. Futures traders should plan to have a minimum of $10,000 in their account, but significantly more is strongly advised for those who will hold positions overnight. This is to ensure you are not being stopped out from market volatility. Margin rates are set specific to the individual market being traded and are a function of the overall risk based on contract value and market volatility for the specific futures contract.  

• Different futures contracts have different trading hours, but generally, trading hours have expanded over the past several years as electronic trading has grown. Futures on the S&P and U.S. Treasuries, for example, are nearly continuous because these markets are only closed for trading from 5 p.m. to 6 p.m. ET daily during the week; trading starts for the week on Sunday evening at 6 p.m. and finishes on Friday at 5 p.m. Grains, however, have limited trading hours, trading from 8 p.m. to 2:20 p.m. ET daily, also starting the week on Sunday evening and finishing on Friday afternoon.

• The Commodities Futures Trading Commission (CFTC) is an independent agency that regulates all derivatives contracts in the U.S., including futures, options, and swaps. It was established by Congress in 1974. The CFTC helps ensure that U.S. derivatives markets are efficient, orderly, fair, and free of fraud.