A Futures Trade put simply it is an agreement
between a buyer and seller of a specific quantity and quality of an
asset for a future date but with the price of that asset agreed at
the point of the contract being made.
Let's look at an example of how someone may trade on the price
of gold (traded on an exchange called the CME or Chicago Mercantile
The price of gold has risen very rapidly in the last few months
and many traders have been able to take advantage of these price
increases by using futures contracts.
Placing a trade
If we go back to our earlier explanation of futures trading we
need 5 different elements for us to be able to successfully place a
trade on the price of gold. There needs to a buyer and a seller, a
quantity and quality of the asset (gold), a date in the future the
buyer and seller want to trade for and a price that they are happy
to trade at.
Buyers and sellers of futures contracts can be found at a
futures exchange and in this instance the CME is where we can trade
gold. Access to this, and other exchanges, is provided by a number
of direct market access trading platforms (we will look at these
later) or by speaking to a futures broker who will execute the
trades on our behalf.
The quantity and quality of the asset is set by the CME and in
this example the gold contract is for 100 troy ounces of the
precious metal (this is also known as 1 'lot') that will be a
minimum quality of 955 fineness.
A date in the future is now required and the CME provides
traders with a number of settlement dates; February, April, June,
August, October and December.
The last and probably most important part of the contract is the
price. This is the price that the buyer and seller agree to trade
Once the buyer and seller agree all of these elements a contract
between the two is created by the exchange. From this moment if the
price of the gold contract rises in value from the agreed price it
is the buyer who will profit, if the price of gold falls in value
it is the seller who will gain.
Opening a Futures account is a relatively straight forward
process and whilst the account may take slightly longer to open
than a CFD account or Spread Betting account it is quite likely
that you will be in a position to start trading within 72 hours of
your original application.
Most Futures Brokers will require a minimum account opening
balance, typically in the region of £5,000
Below is a table of Futures brokers with a few key
account-opening criteria that we believe should be considered when
you are deciding which broker to open an account with. It's not
always about price; finding a broker that suits your style of
trading and your technical requirements is as, if not more,
important than shaving a few pence off of your dealing costs.