Range of Markets

Futures contracts are a diverse instrument that can be applied to a number of practical situations to provide solid investment opportunities. Highly leveraged as a result of their construction, futures provide investors with the flexibility to speculate on long term price movements while also allowing significant profits to be made over the shorter term as prices fluctuate in either direction. A now central part of the fund manager’s armoury, futures are significant in that they apply across underlying assets to provide investment opportunities across the board.

Here are just a few examples of the types of assets that can be traded with futures, and although the list is not exhaustive, it should provide the basis for ongoing successful and diversified futures trading.

Commodities

Perhaps the most obvious and most natural asset class to be traded via futures contracts is commodities. Commodities can be defined as any generic, tangible material that has a practical commercial use – for example, wheat, steel or soya. Because commodities have a natural demand amongst manufacturers, who rely on a steady flow of affordable commodities in order to satisfy their production output, they are sensitive to price fluctuations in response to supply and demand. Likewise, as a generic product, only market factors play into pricing decisions (with no additional product features coming to bear on the price outcome beyond raw supply and demand).

Currencies

Currencies are another common base for futures trading, allowing leveraged speculation on the movement of international currency prices, responsive to global economic triggers. As opposed to forex trading, which can be particularly expensive for long-term leveraged positions (in terms of financing costs, commissions and rollover charges), currency futures can be a more cost-effective way to stake a longer-term position on currencies without actually investing all your capital on a 1:1 basis. As a result, currency futures are also an extremely popular use for futures contracts, and comprise some of the most heavily traded futures on offer.

Shares and Securities

Futures trading can also equally be based on underlying shares and corporate securities. Futures are taken on the performance of a company’s share price or bond price over time and exchanged at some later point for either the corresponding stake in the relevant company (or a corresponding holding in bonds), or for the cash equivalent of the transactional value. Because share dealing is also particularly popular, and seen as a more predictable asset base than many others, the market for ‘second-hand’ futures on securities is particularly buoyant, allowing traders to speculate on the medium-term price outlook while also being able to capitalise on short term price ticks, with the value of their margined futures contracts variable directly to share price performance.

Other Indices

Futures are also traded on wider market movements and indices, reaching a mind-boggling diversity of investment bases. From the performance of the FTSE to US interest rates, it is possible to take futures positions on virtually any index or market, which is otherwise particularly hard to track as an investor. This affords a method for speculating on overall economic performance – for example, if the UK economic outlook over the next 6 months was positive, a trader might expect the FTSE 100 to perform well, and a 6 months futures on the FTSE at today’s index level might prove to be a shrewd investment. Not only are these positions leveraged, but they are also one of the few ways in which an investor can trade on a wider market, helping to spread the risks of a single wild trading result.