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Types of Futures

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Do you want to learn more about futures? Then you’re in the right place. As you may know, stock futures are contracts in which a buyer and a seller agree on a fixed price and expiration date. At the expiration date, the share is sold to the buyer at the agreed-upon price, even if the market price has changed drastically. Next, it’s time to explore the different types and forms of futures.

What are Different Types of Futures? 

If you’re a futures trader, you can choose to trade either financial or physical commodity futures contracts. Both involve the exchange of assets. Financial futures contracts are typically paper assets, whereas physical futures are commodities.

Financial FuturesPhysical Futures
A more familiar product for investors who are used to the Equity market.Generally considered a more advanced investment product that can come with more risk.
Prices are driven by factors such as current market prices, stock index prices and interest rate prices.Prices are driven by weather, seasonality, transportation issues and diseases.

What are Financial Futures? 

Traders who are new to trading futures might start with financial futures. This is because it is typically more familiar territory for traders who are already used to trading stocks. Trading financial futures can be an attractive option for traders and investors who already have experience in Equity markets. Futures have their own exchanges — the Chicago Mercantile Exchange Group (CME Group) and the Intercontinental Exchange (ICE). These exchanges allow traders and investors to trade their futures contracts on electronic trading platforms. These platforms are accessible 23 hours a day during weekdays. 

When you purchase financial futures, you can use margin to decrease your deposit. Using margin is essentially like using what is in your account as collateral for a loan. You only need to deposit 5%-10% of the value of your futures contract. 

Examples of financial futures are:

As with any type of investment, there are pros and cons of financial futures. 

Pros:

  • The futures markets offer a market that is acceptable most hours of the day.
  • You can put down as little as 5%-10% of the value of your futures contract.
  • You’re able to lock in your price for a future date, guaranteeing that you will not pay more for your investment if the price increases. For this reason, some investors prefer futures instead of options.

Cons:

  • Since you are relying on speculation of future prices, financial futures can be risky.
  • You have to lock in an expiration date, so if your asset becomes less attractive as the expiration date approaches, you may not get what you hoped from your investment.

What are Physical Futures? 

Physical futures are considered to be a more advanced and risky market. Physical futures are meant for physical items that are extracted from the earth. Since it is an actual product, there are several factors that can affect the physical futures market and ultimately lead to price changes. Some of the factors that can affect the physical futures market are:

  • Weather
  • Seasons
  • Labor strikes, tariffs, etc.
  • Transportation issues that can interrupt the supply and demand of a product
  • Diseases that can destroy crops and livestock

Because it is a more advanced market, the pros and cons of physical futures can be more exaggerated. 

Pros:

  • If you’re skilled and strategic in making predictions, you can do well with physical futures.
  • Physical futures can be quite easy to buy and sell.
  • You can get higher returns from physical futures.

Cons:

  • Physical futures can be quite unpredictable, so there is a good deal of risk involved.
  • There are several factors that you cannot control that can alter the price of your physical future.

Types of Physical Futures 

To break it down even further, we’ll take a look at the different types of physical futures. 

Energy futures: An energy future is a standardized financial contract with a value based on a specific energy product. The energy products are often oil, natural gas or electricity. When you enter an energy futures contract, you are entering a contract for the delivery of one of these products in the future. These physical futures contracts tend to be in high demand. Energy prices can be extremely unpredictable, and it affects industries and nations alike. 

  • Oil: Crude oil supplies energy for 40% of the world. This product is used to make gas, diesel, jet fuels and others. It is deliverable all year. 

Heating oil futures are a popular future among businesses that are trying to regulate their energy costs. A heating oil contract is deliverable for 18 consecutive months. 

  • Gas: Unleaded gas accounts for half of the U.S. oil consumption. The price can be affected by both the demand for gas and by government laws. It is deliverable year-round.

Natural gas accounts for about 25% of the total energy consumption in the U.S. This is divided between the industry and by both commercial and residential users. Natural gas is deliverable year-round.

Metals market: You’ve probably heard about the price of gold at one point. It is often considered by individuals who are wondering whether it is a good time to trade in their jewelry for cash. Gold is just one part of the metals market. The metals market can be broken down into 3 sections.

  • Base metals: Base metals include copper, nickel, aluminum, zinc, lead, tin, iron and steel. These metals are used most often in commercial production and industrial businesses. For example, copper is often used for plumbing. Aluminum is used in production facilities to make the cans for canned goods. Steel is often used by auto manufacturers. The price for base metals tends to be lower than the other areas of the metals market because they are fairly common. However, prices for base metals change depending on changes in the demand for products that use these base metals.
  • Precious metals: Precious metals are typically more scarce, and therefore more valuable. These metals include silver, gold, platinum and palladium. The product you probably think of when it comes to these metals is jewelry. However, precious metals are also used for coins, medical devices, dental work, art and electronics. Precious metals may also be used for investment and holding purposes. 
  • Rare-earth metals: These are the materials that are used in the electronics industry and in advanced technology items. Think cell phones, cameras and night vision goggles. Despite the name, rare-earth metals aren’t really all that rare. Their value comes from the fact that they are in high demand because it is difficult to extract and process them.

Agricultural products: These products are influenced by seasonal patterns and diseases more than the other types of physical futures. The most common agricultural products are grains and livestock. Some of the less common agricultural products are sugar, cocoa, coffee, cotton and lumber. 

Best Futures Brokers 

After reading through all of that, we can probably agree that the futures market is complicated, right? Luckily, there are futures brokers who specialize in the futures market. When choosing a futures broker, there are a few things you might want to look for:

  • Low commissions
  • Intuitive platforms
  • Excellent customer service
  • Up-to-date research options
  • Top-notch charting and screening tools

Of course, you don’t need to find a futures broker who can offer you every single one of these factors. It all depends on what you think you need. If you’re an experienced trader, you might be less concerned about customer service than you are about having the best charting and screening tools. If you’re just starting out, you might want to prioritize low commissions and finding a broker that you feel comfortable with. There are a lot of futures brokers out there, and they all have something unique to offer.

In our research, we’ve identified some futures brokers that stand out above the rest. If you’re interested in trading futures, one of our favorites is NinjaTrader. NinjaTrader offers a free 2-week trial, which is perfect if you’re a beginner who wants to see what futures trading is all about. It’s also useful for experienced traders who are interested in checking out new platforms.

NinjaTrader offers low commissions, starting at just $0.09 per contract. It also offers options to get the lowest commissions possible by acquiring a platform lifetime license. You’ll have access to a flexible interface, extensive data feed options and the option for a free demonstration. If you want to get to know the essentials of futures trading, we can’t recommend NinjaTrader enough.

Final Things to Know About Types of Future 

If you’re considering trading futures, it’s important to consider the pros and cons of financial and physical futures. To get the most out of trading futures, we recommend:

  • Finding the right futures broker for you.
  • Doing your research.
  • Diversifying your investment portfolio. It may not be the best idea to rely on futures alone.
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