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The cost of buying/selling futures

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trading654 View Post
From what I see so far, it doesn't cost anything to buy/sell futures or, more accurately, enter into a long/short position into a futures contract. It costs zero. All you have to show your broker is that margin. But it's not like you're spending say X dollars to buy Apple stock.

You're partly right, and you may find that you are disastrously wrong. I'll just add a little to what has already been said by others.

You are not actually buying anything. You are entering a contract to buy (or sell) something at a future date. You put up the margin to allow you to do that.

You don't just "show" the broker the margin you put up. The margin is security you deposit against market fluctuations. If the price of the contract goes against you, your account will be "marked to market," and the dollar loss will be deducted from your margin that day. On the other hand, if price goes in your favor, your account will be credited the gain, which can be a large percentage of your margin. It can go either way, and the accounting will be swift and may be brutal, with losses literally over 100% being possible (even though your margin may be gone, you will still legally owe the broker for the rest.)

As @tturner86 said, you are dealing with the price fluctuations of positions that have an enormous market value. A percent or two in the value of the contract can just wipe your margin out.

So that's the disastrously wrong part. Here's the partly right part: you aren't paying any money to "own" the futures contract, because you don't actually own anything when you "buy" it. This is not buying a stock, nor even an actual commodity or any other asset. You are entering into a contract to buy or sell something in the future. If you actually deliver it, or take delivery, at settlement date, then there will be an actual buy and sale of a real asset, and you will be paid or will pay for it, at the full price at that time (which will be vastly more than the margin you put up.)

The amount of margin required is simply intended to ensure that your account can support the losses that it may incur if you are on the wrong side of the trade, on a day-by-day basis.

What's going on is that buyers and sellers of the actual asset want to hedge their exposure to the market by transferring the risk to another trader (who may or may not be hedged.) A trader who is not hedged and who takes the other side will absorb the full loss or take the full profit from the price fluctuations, essentially shielding the hedged trader, who gives up both the chance of a profit from price movements, and the risk of loss. (The trader who takes the other side may be hedged the other way as well, but I'm simplifying a bit for clarity's sake.)

If you take a position without actually intending to make or take delivery, then you will have to close it out before settlement, and you will have a net profit or loss, depending on what price has done since you opened the position. You will have taken your profit or loss in increments each day, as the account was marked to market.

Futures and the many strategies by all the players can actually be much more complex than this, but this is an outline that you should have in your mind as you approach these markets. Without this very minimal understanding, you may just be handing over your money (your margin) much faster than you could imagine possible.

If it seems like everyone has jumped on you, it is because we see someone almost every week starting out heading for disaster, and then they disappear from sight. Usually, they don't take any advice before they vanish. Everyone here does want you to succeed, but you need to understand the basics before even thinking about making the attempt.

Good luck, but do your homework.

Bob.

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