How to participate with Futures Market – to make some $ or lose it all
The Future Market is regulated by the NFA National Future Association and by the FTC, Futures Trading Commission.
In order to become a Future Broker one needs to pass the series 3 Exam. Once passed with a 70% one becomes an Associated Person, or a Broker.
If you intend to become an Associated Person, bellow three articles written to help you with your endeavor. They are free.
If you intend to invest in the Option Future Markets, you are a speculator. Bellow a few tips to help you to understand this market and take the risk.
Futures do not trade in shares like stocks. They trade in contracts. Each futures contract has a standard size that has been set by the futures exchange it trades on. For example, the contract size for gold futures is 100 ounces. That means when you are buying 1 contract of gold, you are really controlling 100 ounces of gold. If the price of gold moves $1 higher, that will affect the position by $100($1 x 100 ounces). You need to check each commodity or futures contract since most of them are different.
1- The Future Markets contract you can purchase online or over the phone. It usually cost $1000 per contract.
2- One contract gives the purchaser a right to participate in the market for the duration of the contract. One contract for Options usually is sold for a period of 90 days, and the owner needs to get rid of it anytime before expiration.
3- A contract can be in your hands for one day, one hour, one month… but the longer you hold it, lesser will be the value of it. Sometimes you may not be able to sell it for the price you purchased it.
4- Every contract gives the purchaser the option of either sell it, take deliver of the merchandise, however, a speculator doesn’t take deliver of it. You will not invest in sugar to receive sugar in your home, unless you are a manufacturer or a food processor that need this type of commodity.
5- To better understand this process, you need to see some basics. Check my text http://miltonlaenearaujo.blogspot.com/2011/01/futures-trading-theory.html
6- You can go either long (buy) or short (sell) in a future contract.
7- Your associated person will help you to decide what commodity to enter the market with.
8- If you entered the market as a long, you own that contract and have to sell it sometime in the future. Let’s say you purchase a contract for gold, you went long on gold, therefore, you like the price of gold to go up, and so you can sell it and make money.
9- When you purchase a contract, you are in control of the size of the contract, and you will either get rid of it or take deliver of the entire contract.
10- If you entered the market as a short, you can only get out of the market by purchasing a contract for the same commodity, same size in the future, therefore you like the price of that commodity to go down. You want to buy low and sell high.
OPTION CONTRACT
Example 1: We are in the end of the winter, and you have an idea that gasoline prices will go up during the summer because more people are traveling. You call your associated person and tell him that you would like to invest in gasoline. He will present you with a Future Option contract that will cost you $1,000 and allow you to control the entire size of the contract of gasoline which is 42,000 gallons. You then purchase 5 contracts and wire him $5,000
You are now in control of 5 X 42,000 gallons. You went long on Gasoline, and you need to sell this contract whenever prices go up a little, for it will give you profit.
Now, we need to find out what was the price per gallon when you purchased it. Because it was winter, the price was $1.50 per gallon. So your contract will say
Option LONG 5 RB @ 1.50 - Date and time will be stamped. If for some reason the price of gasoline goes down, nothing will happen to you, for your contract has 90 days to expire, and prices can oscillate during the period of the contract, but it can not go down too much, or your contract will lose its value, for Option is a decreasing asset. It has incorporated timing and other things that allow you to invest only partial price of the entire contract and the right to control the entire contract. and participate in the market. Option is a type of investment that with a little money you have the option of participating in the market and even make money if your price forecasting is in the same direction you anticipated.
Now, your broker is watching the market, meaning, he is watching all commodity prices every time. You do not have to do it, and that is why you pay commission to your broker when you enter a contract, but never when you get out of your contract. Usually the commission is around $100 to $150 per contract.
Let’s say, you saw while watching Bloomberg TV that prices for gasoline went up due to a mishap with one refinery, or something unexpected. You see that prices for gasoline are now $1.75 per gallon. You purchased it while it was 1.50 and the increase was 25 cents. You called your Broker to learn that he had sent your contract to the floor – Yes, to New York Mercantile Exchange to see what price was it going. He learned that NYMEX would buy it back from you today for a price of $1.57 per gallon. Remember, they are buying and they want to buy it low and sell it high, as anyone else.
You then, get mad with your broker because he said that if prices go up you would make money, and now it did 25 cents higher per gallon. The price on TV is for buying it now, in case you want more, but not for selling because you are investing in an option, and it has 90 days…and each passing day it loses some value due to many things that no one can truly foresee it.
You then sell your contract – You have to sale it when you go long, for it is the only way to get out of the market. You sold 5 contracts and your profit is 7 cents per gallon. & cents times 42000 galloons will be what you will take home.
This is to inform you that when purchasing Options the price needs to go the direction you predicted, as soon as possible and as much as possible, so you can make a fraction of that increase, and take advantage of that fraction multiplied by your entire size of each contract. It is a good investment!
To better understand this check this site later…
FUTURE CONTRACT
Example 2 – The same situation as example 1, except that you make more money because you buy for $1.50 and sell it at $1.75 without any loss what-so-ever, except charges that are minimum. You need to invest as much as you want, (there is a minimum for each contract) for it will be finished in the end of each day. It is a day contract, and you can invest 5.000 on gasoline and play one day… you may lose one day and win another and this way you go on. Your broker will ask for an amount to ensure that you are willing to take the risk. If prices go up and you have a long your broker will get you out in that minute with your authorization…. It is a process where you need to have a broker who takes care of your interest. You wither make money or pay in the end of the day… or anytime you offset.. your broker will decide when to get out, for he may be afraid that your money will not survive and he doesn’t want to call you to deposit more money to meet the loss.
You do not need to be in front of your computer checking prices. This is the job of your broker. Every day in your account will be taken money or deposited money from the market, in accordance with when you offset your contract. You open an account with your broker and hew will advise how much to invest on each commodity. It is the job of the broker to be familiar with what happens in the world, and predict what can go up or down and when.
A Good broker will contact you every day to advise what to do. You do not have to participate every day, but your broker wants you to participate, for he makes a small (disclosed fee) every time you enter, and you can enter many times per day. Prices can go up at 10 AM and go down and 11AM. and go up again… for prices are influenced also by the number of speculators interested in that particular commodity. Your broker needs to be watching that screen.
Sometimes brokers purchase different commodity contracts for one client, and make money here and lose it there, but always talking with the client when to buy and when to sell and what to buy and what to sell. A broker only gets free discrimination when he has a client for over 2 years. At this point the Client can give a Power of Attorney for the broker to do as he pleases.
I highly recommend that people invest in the Market, be it stock or commodity market, or any other market. The more speculators we have, more solidity for prices.
I think that it works like this: The market is world wide, and it keeps track of supply and demand of all products we produce and consume. People use the Market to sell their goods and to buy their goods, even for the future. Contracts are created, and speculators bid on existing contracts expecting prices to change dramatically for them to collect. However, sellers and buyers are in a contract, and the “market” already has calculated prices that are in tandem with each product and it’s fall and rise. The market makes it possible to not have a tremendous price increase or down fall, even if that product went into constraint.
What to WATCH!!!?? When using a broker.
1- Do not send more money just because another voice appeared on the phone telling you that he is a professional and will be taking care of your account. In reality, the person who opened your account should be the only one to actually control it for you, and not another member of the firm.
2- Ask your broker to send back your profits on a regular basis until you recovered what you have invested.
3- If your broker is good, he will start with your money and later play only with market money.
4- Check the background of the firm you are about to invest on, and also check the background of the broker. See if there are any irregularities with NFA or CFTC, and it can be found by clicking on www.nfa.com under broker. Type last name and see what appears.
5- Do not trust anyone with your money, therefore play safely.
Milton Laene Araujo