Investing in Your Future, Regardless of Current Assets
In the financial market, there area multitude of assets that are traded in order for investors to obtain a return oninvestment and obtain their investment goals.
There are some concepts that can be difficult to understand for novice investors, such as the futures market, and all of the technicalities involved.
Before getting into the main subject of this article, it’s important that you know the definition of a futures contract. Basically, it is a commitment to trade a certain asset be it a commodity , a stock, currency or an index made by a buyer investor and another seller, where a price is fixed in the present for settlement in the future.
There are several futures contracts traded daily on B3, among which we can mention:
In the case of futures, expectations about the price of a particular security at a future date are traded. Thus, the investor does not necessarily need to buy the stock, be positioned and, consequently, exposed to the variations that will occur in the market.
Some people may confuse this with the options market; however, we are dealing with totally different modalities. In the case of a holder of a call or put option, the investor only has the right to buy or sell a share, but not the obligation to carry out this operation in the future.
With stock futures, the investor will not be able to exercise the contract as he could with options and have the stock in his portfolio. Instead, the interest of the trader is only about the expectation for the price of the paper, at a future date. Thus, the result of the negotiated price difference is what enters as the main objective of the investor.
To execute the transaction, it is not necessary to buy the shares and thus, disburse the amount to acquire them. As with other futures contracts, it is only necessary that you have a guarantee for the transaction. However, we will discuss this in depth later on.
Among the many possibilities and advantages that stock futures contracts provide, leverage is one of the most important. This is a characteristic present in the futures market and allows investors to be more exposed to fluctuations, which increases the chances of obtaining the expected result without the need to spend a large amount of money to buy the underlying asset.
Main Features of Futures
Now, let’s move on to the technical characteristics of this type of asset.
Initially, it is important that you understand the composition of the trading code for this type of contract. When buying and selling shares, the investor only needs to enter the company’s trading code on the Stock Exchange on the platform, differentiating it from common or preferred, the amount they will trade and then send the order through their broker or investment bank.
Contract Size and Standard Lot
Another thing to keep in mind is the contract size and standard lot. The size of each contract is equivalent to 1 share and, as in the trading of standard lots of shares on the Stock Exchange market; the minimum lot is 100 contracts, which, in this case, is the standard size of each lot.
This means that the investor can only trade multiples of 100 contracts in his trades on stock futures.
Settlement of Stock Futures Contracts
Regarding the settlement, it is important that you know that this is exclusively financial, that is, there is no delivery of the underlying asset. What happens is that the open positions will be settled at the share settlement price, disclosed by B3 and credited or debited on the business day following the expiration or zeroing date of the position anticipated by the investor.
Having understood the main technical characteristics of stock futures, here are some of the advantages of this futures market product:
- Operational Simplicity
One of the points that we can highlight is the operational simplicity that exists in this market. This means that sending orders is very simple and uncomplicated.
All you have to do is have the margin required by B3 equivalent to the number of contracts you want to trade, have it allocated to your account, know the asset code and send the order.
However, this does not mean that trading in this market is easy. The concepts that precede placing an order are quite complex and must meet several criteria.
Leverage is the term used to indicate the possibility of moving large financial volumes with few resources.
The financial market is very flexible and offers several tools and elements that enable investors to obtain different ways to obtain profitability on their resources. One of them is leverage.
So, even with the recent reductions in interest rates and the consequent reduction in the profitability of fixed income assets, more people can choose to try other ways to monetize capital.
Therefore, to invest in the futures market, you use a lower value than the contract, which makes it possible to trade a large financial volume, without the need to have this value in an account.
Thus, it is possible to make a significant return on a reduced portion of your capital. So, to negotiate this contract, it is necessary to deposit in the institution through which you operate, an amount that will serve as the guarantee margin for the operation, requested by B3.
Finally, it is worth noting that leverage is an instrument that should be used with maximum responsibility and awareness.
Trading in stock futures contracts is new. Therefore, the strategies for moving these assets are quite new. This does not mean that the old ones no longer work, but that there are new methodologies that can be added to those already used in the market.
Ease of pair trading operations
Another advantage is the ease of executing pair trading, which is an operation that consists of trading two assets that have a lot of correlation with each other, but that are traded at opposite ends.
Thus, one is always in the purchase and the other is in the sale. The expectation is that one end will perform better than the other for the operation to be profitable.
Protection of investor capital
Futures allow investors to protect their capital against possible sudden fluctuations in the prices of their own shares.
When an investor has a portfolio with several stocks, he is able to fractionate his risks and, consequently, significantly reduce them. This is because any losses arising from an unsuccessful operation can be offset by others that were profitable.
Liquidity is the capacity that a given asset has to be transformed into a financial resource. For example, let’s say you have a stock in your portfolio and you want to sell it. If there are several offers to buy this stock, it means that it has good liquidity.
Generally, contracts traded on the futures market are very liquid and considerably facilitate investors’ operations.
However, the high liquidity of the futures market does not necessarily guarantee that there may be a decrease in interest in negotiating contract actions.
There are specific times in the day where there can be a sudden drop in liquidity, especially before important economic indicators are published, for example. That is why it is important to be aware of the financial market and the variables that can impact it.
Now we’ll show you the points you should consider before investing in futures. The firststep to enter this market is to know your investor profile. You have the option of working with an investment advisor, a robo advisor, or by yourself.Even though it is an asset that enables the most diverse trading strategies, which in itself is a great advantage for the investor, we cannot forget that there is risk involved since this is a variable income asset.
That is why operations in this market are not recommended for conservative and moderate profiles, considering that investors with these profiles have a lower tolerance for the risk of loss, even in exchange for a greater possibility of boosting their profits.
On the other hand, the bold profile fits perfectly in this type of operation. After all, investors who are classified as such know that in order to obtain considerably high returns, it is necessary to take bigger risks.
Cash & carry is a type of transaction based on a concept called arbitrage. In this case, an investor can buy the paper on the spot market and sell it in the future, obtaining profitability with any price differences in both markets.
On the expiration date of the aforementioned contract, the investor’s gross income is defined by this price difference that was received from the sale in the stock futures market and from the purchase of the papers in cash.
Investing is crucial to growing your wealth. As any millionaire will tell you, it’s not about the money you make, but how you spend it. When making any kind of investments, always make sure your decisions are fully aligned with your short, medium and long-term financial goals.