What are futures?
A future is an agreement to trade an underlying value in the future at a price agreed in the present. The underlying value is usually an index, commodity or currency. Due to the leverage effects of futures you can achieve high returns, but you can also lose more than your original investment alone. Because of the high level of risk involved, futures are not suitable for inexperienced investors.
Futures, long and short
Futures are relatively simple. If you think the underlying value will rise, you buy a future. You then make a profit at each point of increase, and a loss at each drop point in the index. In the case of a sale (future short), you make a profit with a decrease and loss when there is an increase in the underlying value. How much profit or loss you make per point of increase or decrease depends on the contract size.
Why invest in futures
With futures, you can achieve high returns because of the leverage effect on a relatively small level of investment, but substantial negative returns are also possible. Futures are often used to hedge a position. For example, if you hold a large number of dollars, you can index with a future FED against a dollar drop in relation to the euro. The high risks and the generally high margin ensure that they are not suitable for beginner investors. Experienced investors must also be well informed of the operation and risks before investing in futures. For more information on features and risks, see the manual in the document centre.
Risks and margins
It is clear with the above calculation examples that you cannot only earn a lot with futures, but you can also certainly lose. In order to buy or sell a future, you must therefore reserve an amount – the initial margin – to meet any future obligations if your vision is not achieved. This margin obligation is deducted from the spending space of your investment account. Due to the high risks, this is a considerable amount for some contracts. For the FTSE, the initial margin for buying or selling one future contract is currently 2,500 pounds.
Calculation example
A future is the FTSE 100. This has the FTSE100 as its base and a contract size of 10 pounds per point. You buy one when the FTSE index stands at of 7500 points. The FTSE then rises to 7525, at which point you sell. You gain 25 points of increase with the FTSE: 10 x 25 means a gain of 250 pounds.
An example of a short is when the FTSE is at a 7525 points when you purchase. The FTSE then increases to 7550 at which point decide to sell. Therefore the FTSE has increased 25 points, but with a future short you anticipated a decline: 10 x 25 means a loss of 250 pounds. So with futures it is possible to make high returns, but it is also possible to collect large losses.
Risk
The information on investment products is for general information and is not intended as an advice. In spite of the fact that Binckbank takes care of the compilation and maintenance of these pages, using sources deemed reliable Binckbank can not guarantee the accuracy, completeness and actuality of the information provided. If you use the information provided without verification or advice, do so for your own account and risk. We advise you to always check any transactions and not to invest in financial instruments that you do not understand the risks. No rights can be derived from the information on these pages.