Today, investing has become one of the most popular ways to earn a passive income and supplement your earnings. However, when most people think of ‘investing’ they think of instruments like stocks, bonds, or mutual funds. However, if you want to diversify your portfolio and harness the power of the short-term market, futures trading in Dubai might be right up your alley. Although it may sound complex at first glance, futures are easy-to-understand financial contracts that allow investors to make a profit by speculating on the prices of assets like commodities, currencies, and indices. Here is a handy guide covering futures trading basics in the UAE to help you get started.
What are Futures?
A futures contract is a legal agreement to buy or sell an asset at a predetermined price on a specific future date. The primary difference between trading stocks and futures is that with the former you own a piece of the company whereas the latter is simply a matter of predicting the fluctuation of prices.
For instance, a trader might buy futures on gold if they expect the price of the metal to rise. Instead of owning the commodity, they are guessing that its price will rise in the future. As a result, futures are useful as hedging tools and speculative investments.
How Does Futures Trading Work?
Here is a step-by-step guide on how futures trading works in general:
- Step 1: Choose an asset
You can trade in futures for commodities – oil, wheat, gold – financial instruments, energy, and even metals.
- Step 2: Enter a contract
Once you choose an asset you enter a contract to buy or sell the asset at a set price and date.
- Step 3: Margin requirements
When you trade in stocks, you have to pay the full contract value of the asset upfront. However, with futures trading, you only have to pay a margin – a small percentage of the contract – which makes trading highly leveraged.
- Step 4: Mark-to-Market
Futures are settled daily, which means that gains and losses are added or subtracted from your account on every trading day.
- Step 5: Settlement
Once the contract’s expiration date approaches, you can either close out your position or take delivery of the underlying asset.
What are the Key Features of Futures Trading?
The salient features of futures trading are as follows:
- Leverage: You can control large contract values with less capital
- Liquidity: Several futures markets are very liquid, allowing traders to enter and exit trades easily
- Standardization: Futures contracts are standardized with regards to size, quality, and expiration dates.
Apart from the features, it is also important to know the pros and cons of futures trading.
Pros of futures trading:
- Diversification: Trading in futures allows you to invest in assets beyond stocks and bonds, including commodities and global indices.
- Hedging: Futures trading is of great help in hedging and can help investors protect themselves against unfavourable price movements.
- Liquidity: Most prominent futures markets trade in large volumes and can allow investors to enjoy tighter spreads and better prices.
- Leverage: Margin trading allows investors to potentially earn large profits from relatively small price movements.
Risks of futures trading:
- Higher Risk: Futures trading allows for greater leverage that can magnify profits; however, the same feature can also cause greater loss if the market moves against you.
- Market Volatility: Futures markets can be unpredictable with prices moving sharply due to global events, supply-demand dynamics, or speculation.
- Complexity: Understanding the ins and outs of futures trading, like contract specifics, margin calls, settlement processes, requires time and effort.
How to Trade Futures in Dubai?
If you want to trade futures in Dubai, here are a few points to keep in mind:
- Educate Yourself: Carve out time to learn more about the nature of futures trading, how major markets work, and the basics of trading platforms in Dubai.
- Choose a Broker: Make sure to do your due diligence and choose a reputed broker who can help you trade in futures easily and provide risk management tools.
- Start Small: Begin with small contracts with lower margin requirements and small exposure.
- Practice Risk Management: Make use of tools like stop-loss and ensure that your lower your risk exposure.
If you want to begin trading in futures, look no further than Orient Finance. One of Dubai’s leading trading platforms, we help you invest in a range of instruments and assets across markets.
Open a trading account with us in a couple of minutes and kickstart your trading journey.