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The cost of buying/selling futures
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The cost of buying/selling futures

  #1 (permalink)
Trading Apprentice
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The cost of buying/selling futures

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.

My question is, is it always the case with entering into futures that you pay zero up front? Or are there futures markets out there where I do not have this luxury of paying zero? So for example, instead of showing the broker $2,000 margin and pay zero, are there futures markets anywhere where I have to pay something like $500 (or whatever the market price is) and show the broker a $1,500 margin, or something of that sort?

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  #3 (permalink)
Market Wizard
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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.

My question is, is it always the case with entering into futures that you pay zero up front? Or are there futures markets out there where I do not have this luxury of paying zero? So for example, instead of showing the broker $2,000 margin and pay zero, are there futures markets anywhere where I have to pay something like $500 (or whatever the market price is) and show the broker a $1,500 margin, or something of that sort?

If you truthfully answer the questionnaire of the broker before trying to open a margin account, you will not get one.
Your question shows that you do not have the experience nor the understanding what margin means.

To get a basic understanding see https://www.interactivebrokers.com/en/index.php?f=marginnew&p=overview
for the broker that you show in your profile. The IB examples also show the different costs.

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  #4 (permalink)
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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.

My question is, is it always the case with entering into futures that you pay zero up front? Or are there futures markets out there where I do not have this luxury of paying zero? So for example, instead of showing the broker $2,000 margin and pay zero, are there futures markets anywhere where I have to pay something like $500 (or whatever the market price is) and show the broker a $1,500 margin, or something of that sort?

You pay a commission. Say $5 per round turn. So you would pay $2.50 when you buy and then $2.50 when you sell.

That is the actual cost of a futures contract transaction. So if you bought ES at 2050 and sold it at 2050 or breakeven you would be debited $5 from your account for the commission.

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  #5 (permalink)
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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.

My question is, is it always the case with entering into futures that you pay zero up front? Or are there futures markets out there where I do not have this luxury of paying zero? So for example, instead of showing the broker $2,000 margin and pay zero, are there futures markets anywhere where I have to pay something like $500 (or whatever the market price is) and show the broker a $1,500 margin, or something of that sort?

When you buy a stock you are buying ownership in the company. The person who sold you that ownership wants/needs to be paid for transferring their ownership rights to you.

A futures contract on the other hand is a derivative, meaning it's price is derived from something else. So when you buy a contract of say CME's S&P 500 eMini (ES), your not actually buying stocks, your buying a financial derivative whose price will fluctuate based upon what the S&P 500 index does. Future's exchanges, to protect themselves and their customers, require that everybody buying or selling futures contracts post an "initial" margin with the exchange. Note that as the position moves against you (in your favor) the exchange will require to post additional (less) 'maintenance' margin to support the position. Margins are not surprisingly contact specific. The bigger the contract size & the greater the volatility the higher the margin requirement.

Note: That in many cases you can take delivery of a futures contract (this is not possible with the CME S&P 500 eMini) in which case you will have to post the full value of the underlying contract to the exchange. This is very very rarely done though, and never by a retail trader.

As @tturner86 states there are commissions associated with trading futures. The exchange has an exchange fee, the broker charges an execution/clearing fee and the NFA charges a regulatory fee. Often this is all bundled in to one brokerage commssion fee. This tends to be tiny though when compared to the notional value of the contract traded though.

As @choke35 states 'margin' is a very dangerous concept and as he recommends I would suggest you do a lot more research before diving in at the deep end.

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  #6 (permalink)
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SMCJB View Post
When you buy a stock you are buying ownership in the company. The person who sold you that ownership wants/needs to be paid for transferring their ownership rights to you.

A futures contract on the other hand is a derivative, meaning it's price is derived from something else. So when you buy a contract of say CME's S&P 500 eMini (ES), your not actually buying stocks, your buying a financial derivative whose price will fluctuate based upon what the S&P 500 index does. Future's exchanges, to protect themselves and their customers, require that everybody buying or selling futures contracts post an "initial" margin with the exchange. Note that as the position moves against you (in your favor) the exchange will require to post additional (less) 'maintenance' margin to support the position. Margins are not surprisingly contact specific. The bigger the contract size & the greater the volatility the higher the margin requirement.

Note: That in many cases you can take delivery of a futures contract (this is not possible with the CME S&P 500 eMini) in which case you will have to post the full value of the underlying contract to the exchange. This is very very rarely done though, and never by a retail trader.

As @tturner86 states there are commissions associated with trading futures. The exchange has an exchange fee, the broker charges an execution/clearing fee and the NFA charges a regulatory fee. Often this is all bundled in to one brokerage commssion fee. This tends to be tiny though when compared to the notional value of the contract traded though.

As @choke35 states 'margin' is a very dangerous concept and as he recommends I would suggest you do a lot more research before diving in at the deep end.

Exactly, the value of one ES contract at 2050 would be $102500. (2050 x $50 per point).

People trading futures on small accounts rarely recognize the total value that they trade per day. 10 trades and you have technically handled $1MM in 'product'.

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  #7 (permalink)
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Serif View Post
I even get payed by my broker to sell or buy futures!

Can you explain? This sounds like a non-exchange instrument.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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  #8 (permalink)
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kevinkdog View Post
Can you explain? This sounds like a non-exchange instrument.

Just some forex/CFD stuff, not futures, and of course everyone with experience knows you pay far more than commission when dealing with a broker who trades against you. Why else pay you to trade?

That crap is for gamblers, not traders. Think of the CFD broker as the casino who gives you a free hotel room and flight if you come drop cash in their casino.

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  #9 (permalink)
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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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  #10 (permalink)
Trading Apprentice
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My friends, thanks for all the replies.

You have basically confirmed what I was saying. It costs zero to enter into a futures contract, and all that happens after that is that I lose or make money on my account based on subsequent price movements. The margin is there in case losses occur. When I say "zero" I'm of course ignoring commissions, fees, and such.

This is exactly what I thought, and you basically confirmed what I said.

So, what I'm now asking is basically: Is this always how futures trading works in practice - namely, that you put zero (nothing) up front and subsequently watch the account fluctuate?

Or are there any futures markets out there (that I'm currently not aware of) where I put up something more than zero up front? Does such a thing ever happen in futures trading?

That's all I'm asking.

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