Futures Trading: A Beginner's Glossary of Key Terms
Futures trading can be a complex and confusing concept for beginners to understand. To help make the process easier, it's important to familiarize yourself with some of the key terms and concepts involved in the market. This article will provide a beginner's glossary of some of the most important terms in futures trading, to help you navigate the market with confidence.
Futures Contract: A futures contract is an agreement to buy or sell an underlying asset, such as a commodity or financial instrument, at a predetermined price and date in the future.
Long and Short Positions: In futures trading, a long position refers to buying a futures contract with the expectation that the price of the underlying asset will increase. A short position, on the other hand, refers to selling a futures contract with the expectation that the price will decrease.
Margin: Margin is the amount of money that a trader must deposit in order to open and maintain a position in the futures market. It acts as collateral and is used to cover any potential losses.
Leverage: Leverage is the ability to control large amounts of an underlying asset using a relatively small amount of capital. In futures trading, leverage is often used to increase potential returns, but it also increases the risk of losses.
Open Interest: Open interest is the total number of outstanding futures contracts that have not yet been settled or closed. It can be used as an indicator of market sentiment and can indicate whether more traders are entering the market or exiting.
Basis: The basis is the difference between the spot price of an underlying asset and the price of the corresponding futures contract. It can be used to gauge the supply and demand of an underlying asset and can indicate whether the market is in a state of contango or backwardation.
Rollover: Rollover refers to the process of closing out an existing futures contract and entering into a new one for the same underlying asset, but with a later expiration date. This is typically done to avoid taking delivery of the underlying asset.
Settlement: Settlement refers to the process of closing out a futures contract by either taking delivery of the underlying asset or by offsetting the position with an opposite trade.
This glossary is not exhaustive, but it covers most of the basic concepts that you'll come across in futures trading. Remember, as with any investment, it is important to thoroughly research and understand the risks before making any trades. Additionally, it's always recommended to seek professional advice and to keep updating your knowledge as the market is constantly changing.