Futures trading is a form of financial derivative trading, where traders buy and sell contracts that represent an agreement to buy or sell a specified asset at a predetermined price and date. In recent years, it has become a popular form of trading in Singapore and worldwide due to its flexibility and accessibility.
If you are looking to get started in trading futures, this article will give you an overview of why people participate in futures trading, its benefits, and its local regulations. At the close of the article, we will also go through some steps you will need to take to open a futures account in Singapore.
Why trade futures?
In short, traders take part in trading futures contracts for two main reasons – to speculate on future price movements and take advantage of potential opportunities to profit, and to hedge existing positions to minimise losses.
One of the main reasons people trade futures is to speculate on the price movement of an asset. When they trade futures, they can buy a contract to bet on the direction of price movements, which can be a great alternative to owning the instrument. This is especially true for commodities that can be physically difficult to transport and store, such as barrels of crude oil and tonnes of industrial metals.
Traders can also use futures contracts to hedge against price fluctuations in the underlying asset. This is efficient for farmers, exporters, and manufacturers that want to hedge assets in the commodity market to lock in prices early for agricultural products. Hedging reduces the risk of price fluctuations in the future, and if a trader is very familiar with the price patterns of a certain commodity, they can also hedge with confidence.
Benefits of trading futures
There are several benefits of trading futures, including the use of leverage, the wide variety of instruments available for speculation, a relatively high liquidity, and finally, the ability to use it for price discovery. Below, we examine each one in a bit more detail.
Use of leverage
The first benefit is that traders can access leverage when they trade futures. Leverage allows traders to control a large amount of an underlying asset with a relatively small investment. Traders only need to put down a small amount of capital to control a larger position, and it allows them to potentially gain more substantial profits if their market price predictions are correct.
However, traders should take note that the use of leverage also increases the level of risk a trader runs when trading. If market predictions are incorrect, traders can run the risk of losing a substantial amount of money that may exceed their initial investment. Therefore, all futures traders should be well aware of their risk appetite before they participate in leveraged trading.
Wide variety of instruments
Another benefit of trading futures is the availability of a wide variety of instruments for speculation. Futures traders can speculate on or hedge against price changes in assets ranging from commodities and currencies to stocks and interest rates.
For example, commodities available include agricultural products, energy products, and precious metals. Currency futures allow traders to speculate on exchange rate movements of currency pairs, while stock futures allow traders to speculate on the performance of stock indices. Finally, traders can trade futures on interest rate benchmarks, like United States Treasury bonds.
The wide variety of instruments available for hedging makes it easy for traders to diversify their portfolios. This can lower the risk of trading overall.
Relatively high liquidity
A third benefit of futures trading is that the futures market is relatively liquid. This means there is always someone trading futures, and there is a high supply and demand of contracts. This makes it easy for traders to enter and exit positions quickly.
Finally, futures markets can help traders discover the price of an underlying asset. This is because the price of a futures contract reflects the market’s expectations of its future price. This can help traders analyse markets and make trend predictions more easily, which can potentially lead to an increased chance of successful trading.
Is futures trading regulated in Singapore?
Yes. In Singapore, the regulation of futures trading is overseen by the country’s central bank and financial regulator, the Monetary Authority of Singapore (MAS). MAS ensures the nation’s financial sector is well-regulated and ensures it remains stable.
Therefore, individuals and financial institutions must comply with the various regulations and guidelines the MAS sets in order to trade futures. On top of this, traders must comply with exchange rules and regulations, including the margin requirements, contract specifications, and trading procedures required of the futures market and contract providers.
The Singapore Exchange (SGX) is the main futures exchange in the country. The SGX provides a regulated and transparent market for futures trading, and it offers a variety of futures products across a range of asset classes, including commodities, currencies, interest rates, and equities.
How to open a futures trading account in Singapore
If you are keen on trading futures as a Singaporean resident, you can do so easily through opening an account with a futures contract provider. Below, we break down into smaller, concrete steps what you can do:
Research different futures contracts providers
Firstly, you should make sure to do thorough research on different futures contracts providers. This means checking the features, fees, and regulations of each provider, and finding the right fit for your needs.
If you are already trading the financial markets, it is not uncommon for your broker to offer futures trading, and you may not have to go through opening a futures trading account just for that purpose. It is also preferred for many traders to stay with their broker, because they can keep all their investments in one place that way and have an easier time monitoring their trading performance.
Gather the required documents
If you decide to seek out a futures contract provider, you will need to provide documents for verification upon opening your account. In Singapore, this usually means presenting your proof of identity and proof of Singaporean residency. If you have decided to stay with your broker with whom you have an existing account, you can skip this step.
Fund your account
After you have verified your account, you should fund it. You can do this through direct debit, bank wire transfers, or through online transfer methods. You should check with your broker or financial institution, as each one may have different requirements and deposit methods.
The bottom line
Futures trading is a great way for traders to speculate and potentially make a profit from future price movements of underlying assets. Traders can also use it to hedge existing positions to minimise losses when market conditions are unfavourable. These two main purposes of futures make the financial derivative a popular one for Singaporeans and other local residents.
Opening an account with a provider is relatively easy given you have the right documents, and the highly liquid futures exchange in Singapore further lowers any barriers to entry to the market. If you want to trade futures, you should remember that it carries risk just like all other forms of trading, and you should never trade more than you can afford to lose.