Introduction to futures
Learn the basics of futures and considerations for trading them.
Futures and futures options trading is provided by Charles Schwab Futures and Forex LLC.
What are futures contracts?
Futures are a type of derivative contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price.
To trade futures, you must have a futures trading account. You can open an account with Schwab, and qualified clients can apply for futures approval.
Uses for futures
Futures generally have two uses in trading: hedging and speculation.
Hedging with futures
One of the reasons futures markets exist is to help facilitate the management of portfolio risk. Thus, some traders may use them to hedge their equity portfolio. One way they might do this is by taking a futures position opposite to their positions in the actual commodity or financial instrument.
Speculating with futures
Futures can be used to speculate on the market to attempt to profit from price swings in commodities, stock indices, and financial instruments. Speculators are the primary participants in the futures market, willingly taking risks that hedgers wish to transfer. Keep in mind speculating on futures can result in you losing more than your initial investment.
Why trade futures?
Around-the-clock trading opportunities
Futures markets are open nearly 24 hours a day, six days a week, allowing you to react to global events, hedge, and speculate on a variety of indices, commodities, and currencies to help manage your portfolio outside of U.S. stock market hours.
Direct market exposure
When investing in stocks, you're investing in a particular company. However, when trading futures, you can gain direct market exposure to specific indices or commodities. This direct market exposure offers the potential for a more macroeconomic view.
Explore the wide variety of futures markets.
Capital efficiency
Establishing an equity position in a margin account requires you to pay 50% or more of its full value. With futures, the required initial margin amount is typically set between 3%–12% of the underlying contract value1.
Leverage offers you the potential to efficiently utilize your capital and generate larger returns as a percent of capital invested. But it can also magnify losses quicker and with smaller market movements, putting you at risk of losing more than your initial investment.
How to trade futures
1. Select a futures market to trade.
One way to get started is to explore futures that are relevant to the companies, industries, or sectors you're already knowledgeable about. For instance, if you've been a long-time S&P 500 investor, an S&P 500 futures contract may be a market to explore.
Futures-approved clients can get real-time futures charting and technical indicators inside thinkorswim®, combined with in-depth research and commentary all built into the platform.
Available on thinkorswim trading platforms, pre-defined futures watchlists can help you discover futures markets.
Note that you'll need a futures trading account to trade futures. Learn more about applying online for futures approval, or talk to a Schwab futures specialist at 877-656-8748 (from within the U.S.) or +1-415-667-8400 (from outside the U.S.)
2. Form an opinion, do research, and understand the risks.
Once you've picked a futures market to trade, it's time to form an opinion on its future price movement.
You can use the Analyze and Charts tabs in thinkorswim to help inform your fundamental and technical research.
Like with any investment, you should develop a plan for your futures trade before you place it. Once you understand your risk tolerance, identify a profit or hedge objective and an exit plan should the trade go against you.
3. Place and manage your trade.
Once you are ready and you've settled on a specific futures contract to trade and created a plan for the trade, you can submit an order for execution.
Using the thinkorswim bid/ask price ladder, enter the underlying symbol to find and select the specific futures contract you want to trade. Next, select your price level, confirm the order details, and submit the order. You can also consider setting up an exit strategy, such as a Tooltip or Tooltip at the time of the trade.
