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Leveraged trading: borrowed exposurerisk 5 of 5: very high, you can lose everything fast

Futures

Rules, protection and tax below are for Australia.

What it is

An exchange-traded agreement to exchange an asset, or its cash value, on a set date at a set price. Farmers and airlines use futures to lock in prices; traders use them to bet on where prices go with leverage of ten to twenty times.

The deposit, called margin, is a fraction of the contract's value. Gains and losses are settled in cash every day, and if losses eat the margin you must top it up at once or be closed out. Because the contract is an obligation, not a right, a bad move can cost far more than the deposit.

Mini and micro contracts have made futures accessible to retail in the US and Brazil. Access has not changed the arithmetic.

How it works

  1. You post initial margin with a broker and open a long or short contract on an exchange.
  2. Every day the contract is marked to the market price and the difference moves in or out of your account.
  3. If your account falls below maintenance margin you must add funds or the position is closed.
  4. At expiry the contract settles in cash or physical delivery, or you roll into the next month for a cost.

The honest pros and cons

For

  • Deep, transparent markets with tight spreads and central clearing.
  • Genuine hedging tool for anyone exposed to a commodity, currency or index.
  • No financing charge in the way CFDs have; the cost sits in the price between months.

Against

  • Losses can exceed the deposit; a margin call can arrive overnight.
  • Leverage of ten to twenty times turns a normal bad week into a wipeout.
  • Rolling contracts month after month bleeds money in many markets.
  • Requires constant attention; this is not something you hold and forget.

Getting it in Australia

not researched

Wherever you are

  1. Ask what you are hedging; if the answer is nothing, you are speculating, and the odds are set accordingly.
  2. Paper trade for months first, and watch how quickly margin calls arrive.
  3. If you proceed, use micro contracts and risk an amount whose total loss, plus more, would not matter.

Go deeper

Also called

futures contracts, micro futures, index futures, commodity futures

Often confused with

  • Commodity ETF: An exchange traded fund tracking a raw material such as gold or oil.
  • Contract for difference: A bet on a price move made with borrowed exposure; you never own the asset and pay daily interest on the borrowed part.
  • Listed options: A contract giving the right to buy or sell at a set price before a set date; most bought options expire worthless.
Futures in Australia · wealth-coop