Futures 101

What is Futures?

Futures is a financial or commodity contract where the price is derived from its underlying assets.

Trading Futures is where a buyer and seller of a financial or commodity contract come together and agree on a price today, or delivery or settlement of the contract in the future.

It is a standardized agreement to buy or sell a quantified amount of instrument at specified price on a specified future date. The quantity and quality of the goods are specified in the contract and the price and delivery period are set at the time the contract is opened.

At Phillip Futures, we offer a variety of products from more than 17 global exchanges:

• Metal Futures
• Agricultural Futures
• Energy Futures
• Index Futures
• Commodity Futures

Who are in Futures?

Arbitrageurs

Investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits.

An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, and buy the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge.

Hedgers

Producers of the commodity or financial institutions who trade futures contract to protect themselves from future price fluctuation in relevant products:

• Agriculture producers – e.g. farmers, oil companies, mining companies, etc.
• Financial Institution – e.g. banks, fund managers, broking firms, etc.

Speculators

Includes almost any investor. For e.g. individual retail investors. Investors simply try to make a profit/ loss by:

• Buying a futures contract if they expect a rise in price
• Sell a futures contract if they expect a fall in price

Why Trade Futures?

Leverage

• Enables you to trade higher valued products with a comparatively smaller amount of capital outlay
• A small movement in the market can translate into a  big movement in your portfolio
• Incorporating leverage into your strategy is essential for success in Futures trading

No need to pick individual stocks

• Enables participation in broad market moves with one trading decision, without having to go through the selection of individual stocks.

Low Transaction Cost

• Commission charges are relatively small as compare to share market
• Commission for Futures contracts are based on a fixed fee per lot per side, rather than a percentage of the contract value

Initiate short position

• Capitalize on opportunities during a downtrend market
• Can be used as hedging tool to minimize losses in the underlying product

Easy and Simple to Trade

• Contract specified exact quantity, grade & date (for commodities)
• Avoid disputes between buyers and sellers
• Contracts can be closed-out before maturity/contract expiration any time
• Each contract required to perform a buy and a sell (vice versa) to complete the transaction only.

Risk Reducing Orders and Strategies

Stop Loss order – An order placed to close or cut position when it reaches a certain price. It is designed to limit an investor’s loss on a position. A stop order becomes a market order once the stop price has been reached. It is also known as a stop order or stop-market order.

Margin Trading

• Initial Margin: Initial deposit your broker collects when you want to initiate a trade.
• Maintenance Margin: A minimum amount that you need to maintain in your account in order to hold a position.
• Margin Call: Request for more funds should your margin account falls below maintenance margin.
• Investor required to top up to initial margin level, or
• Liquidate sufficient positions by T+1.

Margin Requirements

The margin levels for different contracts are generally set by the respective exchanges. This is typically about 2% to 20% of the full contract value. By trading on margin, you are able to leverage on the full contract value.

Minimum Margin

• There are two levels of minimum margin:
• Initial Margin (IM): A good faith deposit required in the customers account to initiate a new position
• Maintenance Margin (MM): The minimum amount of Equity Balance that must be maintained in the customers account in order to hold the position

Force-liquidation Margin (FM)

Phillip Futures reserves the right to liquidate the Futures Contract without prior notice when the Equity Balance falls below force-selling margin of 20%. On the next business day, if margin is still in deficit, you will receive a margin call to top up an amount to the initial margin level.

Advantages of Futures Trading

Leverage Futures market enables the ability of making large profits (or losses) for relatively small outlays of capital (the margin) with the existence of leverage.

Seminar

1. Where can I get the seminar information?
   We update seminar and coaching schedules regularly at our website. Please click here to know more about seminar information.
2. How do I register the seminars or coaching session?
   Phillip Futures provides free education seminars and coaching sessions. You may register at the following link:
   • Online register for both seminar and coaching sessions
   • Call in to make an appointment for coaching sessions only
3. Do I need to pay for one-to-one coaching session?
   Coaching session is conducted at no cost. It mainly caters for beginners who are interested in Futures and/ or Options trading but do not have any knowledge of these products or markets. We focus on the following topics:
   • Guidance on trading platform usage
   • Understanding Futures / Derivatives Trading
   • Market information in Trading
   • In-depth on Technical Analysis.

Feel free to contact us for appointments on weekday at your convenience time. Please click here for more information