A beginner’s guide to trading futures contracts

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Typically, a trader will become familiar with one or two contract types and specialize in a particular strategy based on their goals, risk tolerance, and comfort level.

Table of Contents: Masthead Sticky

  • Futures contracts allow traders to speculate on the direction of price movements on asset classes such as livestock, oil, and soybeans.
  • Investing in futures can provide an additional layer of diversification to a portfolio.
  • Futures are more complex and carry more risks than trading stocks or ETFs because of low margin requirements and volatility.
  • Visit Insider’s Investing Reference library for more stories.

Futures are contracts in which the buyer agrees to buy a commodity or financial instrument at a specified date and quantity at a later point in time, and the seller agrees to sell or deliver the asset as specified in the contract. These contracts were initially created to help businesses navigate unexpected costs. For example, profits in the airline industry can be heavily dependent on the price of fuel. To protect against a sudden surge in prices, an airline company can use a futures contract to lock in current prices, thus nullifying the impact of increasing fuel prices. Futures contracts can be settled in cash or with physical goods. For traders, the settlement is in cash, while some businesses may opt for physical delivery. 

A futures contract can derive its value from various asset types. The most common types are commodities like wheat, corn, and crude oil. Precious metals like gold and silver, currencies, US Treasuries and stock indexes like the S&P 500

But to trade futures, you’ll want to understand the risks and investment strategies before moving forward. Here are four key areas that you’ll want to get familiar with.

Step 1: Understand how futures work — and the risks 

Futures work differently from more mainstream investing options like stocks. Other than speculation, some investors prefer futures trading because it can offer a few benefits that are not available with stocks. For example, futures contracts trade at different hours than the stock market. Instead of 9:30 a.m. to 4 p.m. ET, the futures market is open nearly 24 hours a day, six days a week.

Another benefit to futures trading are the short-selling requirements and tax benefits. Short selling is the process of selling assets that you’ve borrowed with the intent on buying it back later for less money. For stocks, short selling has a higher margin requirement but futures contracts have the same margin requirement on long and short positions making it a bit more conducive for traders who are looking for this high-risk, high-reward tactic. 

As for taxes, some futures trades may qualify for preferential tax rates. “Typically, gains from short-term stock trades are taxed as ordinary income. However, gains from futures contracts are taxed at a 60/40 rate which is 60% long-term and 40% short-term. Currently long-term capital gains tax rates range from 0-20% depending on your federal income tax bracket,” says Moswen James, an enrolled agent at Get Help Tax.

Futures can also help an investor diversify and participate more directly in certain asset classes. For example, the stock price for a company like Exxon Mobile (XOM) will at-times be dependent upon the price of crude oil because of the nature of the company — and other factors like management and competitors. A futures contract on the other hand can be based directly on the price of crude oil without the added risk factors that a company may bring. That does not mean however that futures contracts are less risky, they are still highly complex financial instruments. 

One of the largest risk factors with futures is related to the margin requirements and price sensitivity. “Futures contracts are inherently very leveraged because the underlying valuation is very sensitive to the amount of funds invested as margin or collateral,” says Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business.

Margin is the practice of borrowing money from your brokerage to invest. Current margin requirements for futures contracts are between 3% and 12%. This means an investor could spend $5,000 of their own money to control a $100,000 position, which represents only 5%. If this trade goes in the favor of the investor, there would be a significant windfall. But a negative move could result in serious losses. Before using debt to enter a trade it is wise to carefully consider your risk tolerance. 

Step 2: Choose a futures contract type and market to trade in 

There are different types of futures contracts to choose from. Because each market can be so distinct from each other, a futures trader typically focuses on one or two areas, similar to how a chef may specialize in baking or desserts. This allows the trader to have a deeper understanding of that market and may help inform their trading decisions. Below are the most common categories. 

  • Precious metals: Gold and silver are the most common metals in this category. Investors who choose these types of futures contracts are generally looking to hedge against inflation or financial uncertainty but precious metals can also be used for more practical applications like platinum for semiconductor chips. 
  • Stock index: These contracts derive their value from a stock index like the S&P 500, Nasdaq, or Dow Jones. Investors try to use these types of futures to profit from anticipated movements or announcements from the Federal Reserve. 
  • Energy: Futures contracts that are based on energy would include oil and natural gas. These contracts can also serve as a benchmark for oil prices worldwide. 
  • Agriculture: Agriculture contracts in this category are usually based on things like soybeans, corn and wheat. These contracts are a bit more unique due to the fact that weather patterns and seasonality play a much bigger role in impacting prices and risk. 
  • US Treasury/interest rates: Futures contracts based on interest rates and Treasury bonds play a significant role in international financial markets. Investors in this category closely watch the moves of the Federal Reserve. 
  • Livestock: Traders can even speculate on the prices of livestock like cattle and hogs. Price movements here are subject to consumer tastes and supply and demand pressure in addition to standard risks associated with futures.

Step 3: Choose your investing strategy

There are several investing strategies to choose from, typically a trader will become familiar with one or two contract types and specialize in a particular strategy based on their goals, risk tolerance, and comfort level. Common futures trading strategies include going long or short in a position and calendar spreads which could be bullish or bearish. 

  • Going long: This means that you are buying the contract and you’re expecting the underlying asset to rise. The obvious risks with this strategy occur if the underlying asset drops in value. 
  • Going short: This strategy involves selling the contract in anticipation that the underlying asset will fall in value. This strategy however is risky because losses can be unlimited should the underlying asset rise in value since there is no true limit to how high prices can rise. 
  • Calendar spreads: A calendar spread is a strategy in which the trader takes both a long and short position on the same asset but with two separate expirations. The profit is generated by the spread which is the profit between the contract that was sold and the contract that was purchased. In a bull calendar spread, the trader will go long on the shorter expiration date and go short on the contract with the longer expiration. In a bear calendar spread, the positions are flipped and the trader will sell the shorter expiration contract and buy the longer one. 

Step 4: Place your futures trade and manage it 

A best practice for any trade is to understand the risks and price targets prior to entry. Because of the increased risks of trading futures, contracts should be carefully monitored. This is where the different order types to buy and sell may come into play and help manage the trade. A limit order offers control over the entry and exit prices. If you know the levels in which to enter and exit a trade these limit orders, as well as a stop loss can help traders execute their strategies more efficiently. 

The financial takeaway

Futures trading is not suitable for every investor due to its complexity and risk. “Futures contracts have tremendous price sensitivity compared to the amount that needs to be deposited as margin or collateral. If the investor does not want to close his position after an adverse price move he should have substantial reserves available,” adds Spatt.

What to know about derivatives and how they allow investors to hedge, leverage, and speculateAlternative investments are exotic assets that can diversify your portfolioHow to hedge against inflation with investments that keep pace with rising pricesTrading and investing are two approaches to playing the stock market that bring their own benefits and risks

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A millennial who paid off over $30,000 of student loans and personal debt shares 3 hacks she used to reach her goal

Vee Weir
Vee Weir has paid off tens of thousands of dollars of debt since 2016.

  • Vee Weir, 29, started out in 2016 with student loans, personal loans, and auto loans.
  • She scheduled no-spend weeks and set a strict budget to increase the cash she had for payoff.
  • Then, she used the debt avalanche method to tackle more than $32,000 worth of debt.
  • This article is part of a series focused on millennial financial empowerment called Master Your Money.

Twenty-nine-year-old Vee Weir started out her adult life like many millennials: in debt.

She started her debt-payoff journey struggling with student loans, personal loans, and auto loan debt. The millennial, who now owns her own digital marketing company in Colorado, started to chip away at her debt in 2016. Now, five years later, she’s paid off more than $32,000 worth of debt.

In her experience, three things helped her reach this major goal faster than anticipated.

1. She scheduled ‘no-spend weeks’

Before starting to tackle her debt, Weir realized she needed to find ways to spend less. She decided to lock up her money to stop her spending.

“I put all of my debit cards and my credit cards in a Mason jar, and I put it in the very back end of my closet. I put all of my money in jail, essentially,” she said.

She wanted to make sure that she didn’t spend for a week to kick off her journey. “I only spent money on my essential items, just to see what it felt like, and how I would deal with being restricted on a budget,” she told Insider.

Without spending for a week, and repeating this tactic throughout her journey, she could put more money toward her debt.

2. She made a budget and stuck to it

To save more, Weir knew that she needed to make a budget and stick to it.

Outside of her no-spend weeks, she knew she had to control how much she was spending and increase the amount of money she had free for debt payoff. “I was trying to retrain myself how to be responsible with money because I had no education on it,” she said.

While it was restrictive at the beginning, it forced her to think about money differently.

“I began to make a budget, live intentionally, and live within my means, which I had never really done,” she said. “When student loans are flowing and you’re getting that excess money, you’re paying for housing and you’re paying for essentials, but you’re also not spending wisely, especially as a younger person.”

Eventually, her budget didn’t feel so strict. “Once you start budgeting and you really get in the flow of things, it’s not restrictive, it actually gives permission to spend money and to treat yourself,” she said.

3. She used the debt avalanche method to tackle her debt

Weir started tackling her debt using simple strategies for prioritizing her payoff. She started out using the debt snowball method, where you focus on paying off smaller debts first.

However, she realized quickly that this wasn’t the method for her. She switched to another method called the debt avalanche, which puts higher-interest debts first, in order to help save money on interest.

“That debt snowball method is really great for people who just dread money or dread paying off debt,” she said. “It’s more of a psychological thing when you get those small wins and you’re motivated, so you want to pay off more debt.”

But, she quickly realized that she’d rather have savings instead of motivation. “Mathematically, I would rather have done the debt avalanche to pay off the debt with the most interest, just because it would have saved me a lot of money in the long run,” she said.

Using this tactic ultimately helped her pay off tens of thousands of dollars in debt and become debt-free.

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Master Your Money Bootcamp: Re-evaluate your financial goals

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Welcome to the second week of the Master Your Money Bootcamp. This week we’re revisiting our goals.

Exercise 2: Re-evaluate your goals

In a previous exercise, we made a priority list of our financial goals. And then we calculated how much we would need to set aside each month or each paycheck to make them happen. It’s good practice to revisit those goals periodically because our money can be impacted when life and work circumstances change.

The goal for this week: To see if any financial goals need to be adjusted.

1. Consider what are listed as your top priority goals. Is it paying off a debt balance? Saving for a house? Taking a luxurious vacation? Building an emergency fund? Are those things still your top priorities?

Most of us don’t have the money to work toward every goal at the same time. Be judicious about what you want – or need – the most, and you’ll likely increase your chances of getting there because your resources won’t be spread too thin. After you’ve met one goal, you can pivot and start working on the next one.

2. Ask yourself: Am I saving efficiently? For example, if you’re regularly coming up short in setting aside $300 a month, maybe you need to break it down to $150 per paycheck. Or $75 a week. If you often forget to make transfers from your checking account to savings – or you spend the money before you get the chance to transfer it – automate the habit. Remember that the objective is to remove as much effort as possible so you can focus your time and energy elsewhere.

3. Finally, think about how you can stay motivated. This is important yet often ignored. Dreaming up goals is the exciting part, but the road to getting there can be tedious if you’re only focused on the actions that seem like a sacrifice today rather than the eventual payoff.

Try a vision board, with photos of your goals or words of encouragement, hung up where you can see it every day. Or set up mini-milestone celebrations, such as a dinner out with friends or a spa treatment for yourself (within budget), to mark your progress along the way.

As a reminder, here’s what you’ll accomplish in this month’s Bootcamp (we’ll link to each exercise as it goes live):

For each exercise, you’ll get a detailed explanation of how to complete it and why it’s important. Use the hashtags #MasterYourMoney and #MasterYourMoneyBootcamp to share your thoughts, progress, and connect with others across our Twitter, Facebook, LinkedIn, and Instagram as you make your way through each exercise, then join us for the live events.

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3 steps a 27-year-old millennial took to build a $250,000 investing portfolio

Shelby Farnsworth by a mountain lake
Shelby Farnsworth built a $250,000 investing portfolio in about a decade.

  • 27-year-old Shelby Farnsworth built a $250,000 investing portfolio using several strategies.
  • She automated her savings to put away more, and cut back on her housing expenses.
  • She also took advantage of her employer’s 401(k) program early on, and got a match.
  • This article is part of a series focused on millennial financial empowerment called Master Your Money.

Shelby Farnsworth, a 27-year-old global supply manager at Lyft, started saving and investing as soon as she could, and it’s helped her build a large investment portfolio at a young age.

Farnsworth used simple accounts almost anyone can open, and was able to save and invest her way to a $250,000 portfolio in about 10 years.

Here are the three main methods she used to reach this major milestone quickly.

She automated her investments

From her 401(k) to her individual investing account, she automates her finances to make it easier to save and invest.

“Living in California, it’s hard just because everything here is expensive and there’s always something going on. So for me, it’s having everything on automatic withdrawal,” she told Insider.

She sets up automatic deposits from her checking account to other saving and investing accounts.

“Between my 401(k), I never see that money. I’ve got money that’s set up to go to the Roth IRA, and then money set up to go to my personal management fund,” she said.

Automating her investments made it easier to save consistently and save more over time.

She tried to keep her housing expenses as low as possible

Living in San Francisco, Farnsworth’s largest expense has long been her rent. But over the years, she’s found ways to get creative to keep her costs down.

“A lot of it was making sure that my rent was controlled,” she said. “I lived in some pretty interesting living situations just to make sure that that huge chunk of change where people typically spend 50% or 60% of their money, mine was at 20% to 30%.”

As her income has risen, she’s been able to move into a one-bedroom apartment – no more roommates or “interesting” situations – but her housing costs are still 30% of her income.

She started investing as soon as she could, and took advantage of employer matches

Since she started working, Farnsworth has been taking advantage of 401(k) programs offered by her employers. By starting to invest as soon as she could, she’s been able to use the power of compound interest – where money grows based on money earned – to her advantage.

“Just having time on my side through college and my very early 20s, that small chunk of change has become larger and larger and larger as my salary has grown,” she said.

Her employer match has been another critical part of the equation – that match equates to free money her employer contributes towards her retirement savings, up to a percentage of her salary. Matches are an easy way to save more, without having to contribute more. It’s something that helped Farnsworth grow her portfolio and build her net worth.

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Master Your Money Bootcamp: Open the financial accounts you need

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Welcome back to the Master your Money Bootcamp. This week we’re going to stop procrastinating.

Exercise 2: Open the accounts you need

Sometimes it can feel like all the administrative work it takes to keep our personal lives running smoothly is a full-time job in and of itself. Opening a new account? I’ll do it later, you say. But then later turns into tomorrow and tomorrow turns into someday. It’s a 10-minute task that routinely gets pushed to the bottom of our to-do lists.

The goal for this week: Open savings and investment accounts for each of your goals.

1. Expect to spend about 30 minutes to an hour on this task. If you don’t have the time right now, create an event on your calendar for later this week – and stick to it.

2. When you’re ready, take out your list of financial goals. Tackle the ones that require a savings account first since they’re the easiest to set up (it shouldn’t take more than five minutes per account).

If you haven’t decided which bank or credit union to use yet, check out our lists of the best high-yield savings accounts, best money-market accounts, and best CDs. If you’re easily overwhelmed, go with an organization you already use and trust. Any savings account with a moderate to high APY and no maintenance fees is likely a fine choice.

3. Next, move on to investment accounts. If you haven’t started saving for retirement yet, find out what plan your employer offers. Aside from the stellar tax benefits that come with a workplace retirement account, you may also be able to get a match on your contributions. If you are already putting some money into your workplace account, consider whether it’s time to open an IRA (here’s how 401(k)s and IRAs compare).

For longer-term goals that aren’t retirement-related, you may have decided to invest your money rather than park it in a savings account. You’ll be taking on more risk this way, but also open yourself up to growing your balance. Here’s a rundown of the best online brokerages for every type of investor. When you open an account, the brokerage will often ask questions about what goal you’re investing for, your timeline, and your appetite for risk (known as your risk tolerance) to provide a list of appropriate investments. Some brokerages even have advisors that can help for an additional fee.

As a reminder, here’s what you’ll accomplish in this month’s Bootcamp (we’ll link to each exercise as it goes live):

For each exercise, you’ll get a detailed explanation of how to complete it and why it’s important. Use the hashtags #MasterYourMoney and #MasterYourMoneyBootcamp to share your thoughts, progress, and connect with others across our Twitter, Facebook, LinkedIn, and Instagram as you make your way through each exercise, then join us for the live events.

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Master Your Money Virtual Event: How to create generational wealth

Master Your Money Event 3 2x1 no logo

Just about everyone wants to give their kids a head start in life, and building generational wealth is an effective way to do it.

To help millennials take control of their money, Insider presents “How to create generational wealth,” a free, live virtual event that’s part of our Master Your Money series, presented by Fidelity.

This free, live virtual event will take place on Tuesday, October 5 at 12pm ET. Register below:

In this virtual hour-long event, two personal finance professionals and a Personal Finance Insider moderator will discuss the different forms of generational wealth, why it’s so much harder to create for some communities than for others, and how you can start building wealth that will outlast you.

“How to create generational wealth” will be the culmination of Insider’s third month-long Master Your Money Bootcamp, which challenges anyone to make a plan for their money that will build wealth over time. Learn more about the Bootcamp here.

Topics will include:

  • The different forms generational wealth may take
  • The advantages of setting up resources your children (or grandchildren) can access
  • Strategies for building wealth that will outlast your generation

The discussion will be moderated by Ronda Lee, associate editor of insurance for Personal Finance Insider. She’ll be joined by Sara Glennon, Financial Consultant, Fidelity Investments, and Echo Huang, CFA, CFP, CPA, Founder & President, Echo Wealth Management.

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The Master Your Money Bootcamp will help you make a plan to reach your goals

Master Your Money Bootcamp make a plan 2x1

In our first two Master Your Money Bootcamps of the year, we got organized – and then we used that mental space to start dreaming big: If your money could accomplish anything, what would it be? Would it pay off your credit card debt? Take you out to a Michelin-starred dinner? Send you abroad for a week? Finance a wedding your family will be talking about for a decade?

Once we knew what we wanted our money to do for us, we started planning: How much will that actually cost? How long exactly will that take to achieve? We identified the obstacles standing in our way, and we got serious about choosing a starting point.

Dreaming is the easy part.

Now, it’s time for action – the hard part. Don’t worry! We’ll be right there with you, explaining the tools you can choose from and guiding you through picking the right one for your own goals. We’ll walk you through opening accounts if you need them, setting up an automated system that will hum along in the background as you go about your life, and we’ll help you decide whether you need a professional to keep things moving forward or whether you can handle it on your own.

We’ve said this before, but it’s worth saying again: We know the ability to afford your dreams depends on a lot of things, including your job, your living situation, your credit, and the flawed systems in the US that favor some people over others. We know that a few months of strategizing can only get you so far. But no matter how big (and expensive) your dreams, you have to start somewhere.

Welcome to the Master Your Money Bootcamp

Master Your Money Bootcamps are month-long challenges broken into simple one-week exercises to help you take control of your money.

Over the course of 2021, we’ll conduct four of these Bootcamps, each culminating in a free, live, virtual discussion among experts about how to make the most of the tasks you’ve already accomplished. You can take all four Bootcamps this year, or pick and choose the ones that give the guidance you need most.

For each weekly exercise, you’ll get a detailed explanation of how to complete it and why it’s important. Use the hashtags #MasterYourMoney and #MasterYourMoneyBootcamp to share your thoughts, progress, and connect with others across Twitter, Facebook, LinkedIn, and Instagram as you make your way through each exercise, then join us for the live events.

While you’re here, feel free to visit (or revisit) our previous Master Your Money Bootcamps from this year. The first Bootcamp broke down the major task of demystifying your finances into four achievable steps; the second Bootcamp helped you put a price tag on your dreams and create a plan to help you afford them in the future.

Our first Bootcamp exercise launches on September 6, 2021. You don’t have to sign up – just dive in! Here’s what you’ll accomplish in just one month (we’ll link to each exercise as it goes live):

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A survey of 2,000 Americans found they’re more likely to talk about politics and relationships with their friends than money

two men talking to friends
Americans are more likely to talk to their friends about politics and sex than money, a Master your Money poll found.

  • A taboo around money persists in America, according to a new Insider poll.
  • Talking money with friends is unpopular across all generations, and more so among older Americans.
  • Money is a sensitive topic, but discussing it can lead to better financial outcomes.
  • This article is part of a series focused on millennial financial empowerment called Master your Money.

Even after a year in which personal financial hardship dominated the national conversation, results from Insider’s new Master your Money Pulse Poll suggest that Americans still aren’t comfortable discussing money with friends.

When asked which topics they regularly discuss with friends, each of the following outranked the topic of money: health, sex and relationships, politics, current events, and pop culture. The survey was conducted in May 2021 and included responses from 2,130 people 18 and older.

Although there is some variation among generations, the trend tracks across all age groups – Americans are most likely to talk about current events with their friends and least likely to bring up finances.

Old Americans say the are less likely to talk about money with friends:

  • 47% of 18-to-34 year olds regularly discuss money
  • 38% of 35-to-54 year olds regularly discuss money
  • 25% of 55-to-74 year olds regularly discuss money

These results underscore a longstanding taboo around discussing personal finances in America. This “society-wide gag rule” exists at varying degrees, Joe Pinsker wrote in an article for The Atlantic, particularly between socioeconomic classes, genders, and cultures.

“Many Americans do have trouble talking about money – but not all of them, not in all situations, and not for the same reasons. In this sense, the ‘money taboo’ is not one taboo but several, each tailored to a different social context,” Pinsker wrote.

Talking about money can lead to better financial outcomes

Money is an uncomfortable, emotionally charged topic for a lot of people. If you feel like you’re lacking or not saving as much as you’ve been told to, there may be embarrassment or shame. If you feel like you’re doing well compared to what you know (or assume) of others’ situations, there might be a tinge of guilt.

The negative associations go on and on, so it’s no wonder most Americans aren’t chomping at the bit to discuss their bank balances, debt journey, or salary with their social circle. But this tendency to be tight-lipped can be more harmful than we realize, particularly when it comes to solving issues like equal pay and the racial wealth gap.

Interestingly, when it comes to asking for advice, a higher share of the Master your Money survey respondents said they go to friends than a financial planner – though most turn to relatives and financial websites.

The younger a person is, the data revealed, the more likely they are to ask friends or relatives for financial advice. As a person approaches their retirement years, they are more likely to get advice from a financial planner.

Working with a professional, such as a financial planner, coach, or therapist, can help you navigate your current money struggles and even uncover the deeper beliefs and attitudes holding you back from making progress. Data show people who seek help from an advisor are more likely to report happiness, confidence, and stability in their financial and personal lives compared to those who go it alone.

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