4 Terminology Terms to Understand about Futures Trading

Futures Trading

Futures are the derivatives financial contracts that compel the parties involved in a contract to transact an asset at a preset future date and price. The buyer must purchase from the seller. The seller must sell the buyer the underlying assets at an underlying set price without considering the market prices or the expiration date.

The underlying assets may include physical commodities, services, or financial instruments. Futures contracts detail the quantity of an underlying asset and standardize it to facilitate trading on a futures exchange. Futures are primarily used to hedge trade speculations. Several terminologies are used in future trading, and listed below are the four commonly used that will help you further understand future trading and contracts.

1. Brokerage Commission

The Brokerage Commission, also referred to as brokerage fee, is a broker’s fee to a customer to execute a trade. The brokerage fee and the brokerage commission are often used in the same breath. It’s important to note that the two terms referred to two different things.

The brokerage commission refers to the money a broker makes when they place a trade or a transaction on behalf of an account owner. In contrast, the brokerage fee is the flat rate an agency charges for clearing firm charges and managing the account on behalf of the owner. The brokerage fee is a certain percentage of the account value.

Several full-service brokerages collect a substantial percentage of their profit from commissions. These commission fees range widely from one brokerage to another, and it’s crucial to find one that will work best for you.

2. Cabinet Trade

The cabinet trade allows options traders to liquidate the deep-out-of-the-money options by trading the available options at a price that equals less than one tick. The price amounts to one-half of one percent of a face value. The cabinet trade is used as the final option of more or even less option to help recoup the fraction of loss and the lowest tradable prices for the options.

3. Clearing Margin

A clearing margin is a financial safeguard that helps in clearing companies and corporations perform on the customer’s open futures or options contracts. They are distinct customer margins for individual buyers and sellers of the future and option contracts required to deposit with brokers. This ends up clearing the liquid fund brokerages’ margins that other clearing firms should have instant access to guarantee the transaction’s completion with their customers. They should have money to pay for all the open accounts in case the customers decide to sell.

4. Leading Indicators

They are the market indicators that help to signal the state of an economy for the future. For instance, the manufacturing workweek, index of consumer expectations, initial claims for unemployment insurance, new building permits, orders for consumer goods and material, unfilled orders for durable goods, percentage of companies reporting slower deliveries, plant and equipment orders, change in material prices, prices of stocks, change in money supply and change in manufacturers’.

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