Investing in futures

Future is a financial instrument, which is a contract to buy or sell a particular commodity at a particular time,price and amount in the future. Futures are financial derivative. Derivative is a security that is dependent on one or more financial commodities and they have usually a high-leverage. Futures commodities contain foreign currencies, stock indexes, metals, petroleum, agricultural products and financial instruments.

Investing example for buying corn futures (opening a long position) :

The investor buys 5000 bushels corn for may at 6$/bushel. The nominal value of this contract is 30000$ (5000×6$). The margin is 1500$, which the investor must deposit (the required deposit is different at several companies). So the leverage is 1:20 (1: 30000$/1500$). The price of the corn at the end of april climbed to 6.30$ and the investor decides to sell his contract. This means, that the investor gained 0.30 $ (6.30$-6$)/ bushel. His total revenue on this contract is 1500$ (0.30$×5000). So he doubled his capital with this contract. But, when the price of this contract fells to 5.70$, the company warns the investor to put more deposit on his account or the contract will be closed, because he lost all of his deposited money.

Investing example for selling light sweet crude oil (opening a short position) :

When the investor sells the contract, he expects that the contracts price is going to fell. The investor buys 1000 barrels of may crude oil at 110$. His contract has got a nominal value of 110000$. The investor is trading at the same company, so his leverage is the same, 1:20. The required deposit in this case is 5500$ (110000$/20). The price of the light sweet crude oil has dipped to 105$ several days later, so the investor sold his contract. He earned 5000$, because he gained 5$/barrel and he had 1000 barrels.

It is very important to see that during these trades the price changing (in percentage) of the picked futures is small and the returns are huge. For example at the corn trade, the price of the corn moved to 6.30$ from 6$. This means a 5% change in the price of the corn, but the investor gained 100% regarding to his capital. These price changings can occur at the opposite site of our trade, which means that the investor lost his capital.