There has been a lot of interest in futures trading in Australia—a high-risk, high-reward investment that requires careful analysis and a thorough understanding of the market.
Read on to discover more about trading futures, what risks are involved and how to get started with futures trading in Australia.
What Is Futures Trading?
A futures contract, better known as futures, is a legally binding agreement between two parties to buy or sell an underlying asset (commodity or financial instrument) at a predetermined price at an agreed time in the future.
This means that under this agreement the buyer of the contract is obligated to buy and receive the underlying asset at the expiry date. The seller on the other hand is obligated to supply and deliver the underlying asset when the contract expires.
The buyer has to purchase or the seller has to sell the asset at the price set in the futures contract, even if the market value of the asset at the expiry date is higher or lower than the purchase price stated in the futures contract.
Futures contracts are traded on futures exchanges, such as the CME Group or ASX 24. They are a standardised contract, which is set by the exchange and contains details about the underlying asset, the minimum price movement, the quantity of goods and the month in which the contract expires. The contract also determines how it will be settled upon expiry.
How does futures trading work in Australia?
To get started you need to open an account with a futures broker. Keep in mind that in Australia, all futures brokers must be licenced and be a Trading Participant of ASX Futures. You can see a list of all licensed brokers here.
Our pick for the best futures broker in Australia is Interactive Brokers. This versatile trading provides access to a wide range of investments, including futures, currencies, bonds and stocks—all from a single platform. In terms of futures trading, IBKR provides access to a variety of asset classes, such as Agriculture, Energy, Fixed Income and Volatility Futures. Commissions are quite low starting from $1.00 per contract and going up to $3.55 depending on trade volume.
While there is no rule regarding commissions and fees, most brokers will require both parties to pay an initial margin requirement, which is determined by the size of the contract, the reputation and circumstances of the investor and the broker’s terms and conditions.
Since you are trading on margin, you will only deposit a fraction of the contact’s value.
You can use a futures contract for hedging (locking in the market price of a commodity) or for speculation (betting on the price of the underlying asset).
In the case of the latter, traders could sell the contract before it expires and thus cash in on their prediction. However, if the contract position is not closed out before it expires, the seller is obligated to sell the underlying asset to the buyer, who must accept it.
Depending on the terms set out in the futures contract, it can be settled in cash (most futures contracts are). In this case, the holder of the contract will get or pay out the difference between the purchase price (set in the futures contract) and the current market value of the underlying asset at the expiry date.
In some cases, an actual physical commodity will have to be delivered, usually, when a company is locking in the price of the asset they need for production. The investor who is holding the contract is responsible for storage, insurance and handling of the asset prior to the expiry date.
What can you trade?
The Australian futures market is very diverse and investors can trade in several underlying assets, including:
- Commodities, such as natural gas, crude oil, wheat, and precious metals (gold, silver)
- Stock index futures (S&P 500 Index or S&P/ASX 200)
- Forex futures
- Bonds and interest rate futures
Applications of Futures
There are two types of players in the Australian futures market speculators and hedgers.
If you are looking to trade futures without owning the underlying asset, you can consider CFDs. IG Markets is one of the best CFD providers. It gives Aussie investors unique access to futures trading by allowing them to speculate on the price of futures going up or down using CFDs. This way you will not own the underlying asset and you won’t be obligated to buy or sell the asset when the contract expires. IG users can trade futures on commodities, indices and bonds. The company gives access to 18,000 global markets, including hard and soft commodities, German, UK and US government bonds and stock indices like Wall Street and FTSE 100.
Using futures for speculation
Investors and traders will use futures to make a profit by speculating on the price movements of the underlying asset.
If an investor purchased a futures contract and the price of the underlying asset rose, they could sell the contract before it expires on the futures market at the current price and make a profit, thus closing the long position. In this case, the futures contract will be settled in cash.
The trader may, however, suffer a loss if the underlying asset’s price fell below the purchase price stipulated in the futures contract.
Traders could also speculate on prices of commodities going down, so they can take a short/sell speculative position. If the price does fall, the trader will take an opposing position, i.e. close and settle on the contract. The contract will again be cash-settled—the investor will make a gain if the price of the underlying asset is lower than the price set in the contract.
Large gains can be realised with this type of investment, but it could also lead to serious losses as margin trading enables investors to get a much larger position than the amount they have in their account. So, if the amount speculated is higher than the trader’s balance, the broker would have to make a margin call requesting that additional funds be deposited into the account to cover losses.
Using futures for hedging
Hedgers are usually bankers, farmers and manufacturers who use futures trading as a type of insurance against future price fluctuations of a given commodity. Thus many of the companies that deal in this type of investment are actually the manufacturers or users of the underlying asset.
Corn farmers, for instance, can use futures to lock in a specific price for their crop. This way, they reduce losses if the market price of corn were to decline—the farmer would make a gain on the hedge and offset losses from the sale of the commodity on the market.
Related reading: How to invest in gold
What are the benefits of trading futures in Australia?
1. More opportunities
With futures traders can profit from the rising and falling prices of the underlying asset by selling or buying a futures contract, unlike trading in shares where you can only realise gains if the price goes up.
What’s more, futures provide access to underlying commodity assets (unlike stocks and ETFs which are secondary market products) as well as instruments you might not be able to find on other markets. Finally, futures exchanges work extended hours, so they are more available to Australian investors than traditional stock markets.
2. Low commission
Unlike trading apps that specialise in stocks, crypto or ETFs, most brokers do not charge commissions on futures trading. Others might charge a fee based on the size of your order, which means you can trade smaller volumes without paying huge fees.
3. Profitable
If done right, futures trading can be very lucrative. Since futures use leverage, you don’t have to put up 100% of the value of the contract when entering the trade, but rather a fraction of the cost, so the initial investment is not that high.
4. Various uses
You can use futures to speculate on the direction of the price of the underlying asset or hedge the price to protect your assets from possible price fluctuations.
What are the downsides of futures trading?
Leverage
Since futures are a leveraged product you could end up losing more than your initial investment. An investor leveraged 30:1 will stand to profit or lose 30% by a 1% change in price.
Not great for beginners
The biggest disadvantage of futures trading is that there are huge risks involved, so it is not the most suitable option for inexperienced investors. It also requires a good understanding of the market and detailed research of the commodities and assets traded, something that new investors might not be familiar with yet.
Check out our list of the best stock trading apps for beginners
Risky
Even advanced investors need to take care when trading futures—as mentioned above it can be very lucrative but only if the market is researched extensively. Speak to a financial consultant before deciding on this investment option. If you feel that futures trading does not mean your risk appetite, you might be better off with a different kind of investment.
- Interested in earning passive income? Take a look at these helpful articles:
- What are managed funds
- How to invest in index funds
- How to invest in US stock
Trading futures in Australia: Tips to consider
Take a look at some pro tips that can help you navigate this complex market.
- Make sure you understand the risks involved
All investments require careful planning, but futures even more so.
Trading futures can lead to huge gains but is also quite risky, so keep in mind that you might not walk away with a profit and be prepared to potentially lose more than what you initially invested. One way to minimise risk is to carefully research the market—look at both past performance and future projections of the company you are investing with or the asset class you are interested in trading.
- Find a reliable futures broker
Check if they are regulated and licensed. Also, look into what trading platforms they offer since each comes with different research and analysis tools. You will need these to keep track of your investment.
Another thing to consider is margin requirements which will tell you how much you need to invest in the beginning and how much you will be charged to withdraw your funds if you make a gain.
- Choose a market you are already familiar with
This will make it easier to speculate on future prices and will require less research on your part.
- Plan ahead
Futures trading requires more planning than investing in stocks and shares, and there are more factors you need to consider. It’s also important to have an exit strategy in place and be prepared beforehand for the worst-case scenario.
- Don’t get carried away
If you are an experienced investor, it might be tempting to go all-in, but this way you are overexposing yourself to unnecessary risk.
Futures vs. Options Trading
Futures and options are both derivatives as their value is derived from the value of the underlying assets. However, they are a whole different ball game.
The biggest difference is that with futures both parties are obligated to buy or sell the asset at the predetermined time in the future at the set price, regardless of the market price at the time of execution.
With options, the holder can buy or sell but is not obligated to do so, meaning they can buy, sell or hold the shares when the contract expires.
Interested in options trading? Take a look at our list of best options trading platforms.
Final Words: Are Futures Worth It?
Trading futures can be profitable—traders can get started with a lower initial investment, while returns could be extremely high. At the same time, it is not for everyone as it requires a thorough understanding of the market and the ability to research it properly in order to minimise losses.
If you believe you have what it takes and are willing to take on the risk, find a trustworthy futures broker, prepare a trading strategy, use all the research and trading tools at your disposal and hope you’ve analysed the market well enough.
1. Can I trade futures in Australia?
Yes, futures trading is allowed in Australia. To get started make a trading plan, choose a market you want to invest in (possibly one you are familiar with) and find a reliable futures broker.
2. Can you trade crypto futures in Australia?
Yes, although ASIC has warned Australian crypto traders about investing in crypto-asset-related financial products, like futures, options and binary options, especially if they are dealing with an unlicensed platform. The government has taken steps to crack down on unregulated offering of options and futures token products in Australia, banning Binance, one of the biggest global crypto exchanges, from derivatives trading activities. The company announced in July 2022 that they will resume these activities in Australia.
3. Can you trade futures on the ASX?
Yes, those interested in buying and selling futures contracts can carry out transactions on the ASX 24.
4. How do I become a futures trader in Australia?
To get involved in futures trading in Australia, you need a futures broker licence. If a broker only advises the client but does not deal in future contracts, then they would only need a futures advisers licence. You would also need some kind of university qualification in commerce, accounting, economics or actuarial science to work as a futures broker in Australia.
