Reduce risk futures

The risks of futures

Futures are an interesting investment form for professional and experienced investors and experts, but for the novice investor or ‘hobby investor’ it may be a bit too ambitious. Investing with futures is really a profession in itself and is not something you can learn in an evening. So you will really have to delve into the subject and fully immerse yourself in the material.

Futures can rise indefinitely and also fall all the way to zero. There are therefore no limitations in the risks of a futures contract, which is why it also has many similarities with a (call) option.

With a future, the buyer and seller agree on a quantity of an underlying asset that the buyer will buy at a predetermined and agreed price. In other words: it is a future agreement to trade at a now agreed price. The underlying asset can be anything: shares, bonds, commodities, dollars, a stock market index or even vegetables and crops. In the meantime, it is possible that the future can change owner, because the futures can be traded on the stock exchange.

Minimizing risks

In order to keep the risks of futures as minimal as possible, it is important to check the contract specifications of the future carefully before you invest in the future. Of course, you want to know what the current underlying value is and how long the term is, but do not forget to pay attention to the contract size and the amount of the quantities to be held.

Most futures sellers trade futures with the stop loss principle. This principle protects you as an investor against possible excessive losses. This principle is recommended for all investors.

In addition, it is important to check how the payment takes place. Most futures often have a ‘cash settlement’. A cash settlement means that you are paid in money. However, there are also futures where you are paid physically. If you have invested in an oil future, it is possible that you will actually receive the oil barrels. It is best to only see these physical products as a protective product to perhaps hedge certain positions in a portfolio. However, gambling with futures is always not advisable.