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Futures Contract Trading Example

If you want to speculate on the future share price of a company such as UK mining company Xstrata then one solution could be financial spread trading. By financial spread trading on Xstrata, investors can speculate on the future share price rising or falling.

If you were to look at the FinancialSpreads.com site, they are currently showing the Xstrata Rolling Daily market at 1018.8p – 1021.0p. As a result, you could speculate on the Xstrata shares:

  • Moving above 1021.0p, or
  • Moving below 1018.8p

Whilst financial spread trading on UK equities you can trade in $x per penny. Therefore, if you decided to invest $4 per penny and the Xstrata shares move 5p then there would be a difference to your bottom line of $20. $4 per penny x 5p = $20.

You can also trade this market is Euros per penny and Pound per penny.

Futures Contracts – Rolling Daily Markets

Be aware that this futures market is a Rolling Daily Market which means that there is no closing date. If you decide to leave your trade open at the end of the day, it will stay open and roll over into the next day.

If your trade is rolled over and you are speculating that the market will:

  • Rise – then you will be charged a small overnight financing fee, or
  • Fall – then you will often receive a small payment to your account

Futures Trading Example

So, if you consider the spread of 1018.8p – 1021.0p and make the assumptions that:

  • you have analysed the markets, and
  • you feel that the Xstrata shares are likely to go higher than 1021.0p

then you could choose to buy at 1021.0p for a stake of $2 per penny.

This means that you win $2 for every penny that the Xstrata shares push above 1021.0p. Of course, it also means that you will lose $2 for every penny that the Xstrata market decreases lower than 1021.0p.

Put another way, if you ‘Buy’ a trade then your profits (or losses) are calculated by taking the difference between the closing price of the market and the price you bought the spread at. You then multiply that difference in price by your stake.

If after a few trading sessions the share price started to move upwards then you could choose to close your position in order to lock in your profit. So if the market moved up then the spread, determined by the financial spread trading firm, could change to 1064.4p – 1066.6p. To close your position you would sell at 1064.4p.

So, with the same $2 stake this trade would make you a profit of:

  • Profit / loss = (Closing Price – Opening Price) x stake
  • Profit / loss = (1064.4p – 1021.0p) x $2 per penny stake
  • Profit / loss = 43.4p x $2 per penny stake
  • Profit / loss = $86.80 profit

Financial spread trading on equities is not always simple. In this example, you had speculated that the share price would go up. Naturally, the share price might go down.

If the Xstrata shares began to drop then you could choose to close your trade to stop any further losses.

So if the spread fell to 982.7p – 984.9p then this means you would settle your position by selling at 982.7p. This would result in a loss of:

  • Profit / loss = (Closing Price – Opening Price) x stake
  • Profit / loss = (982.7p – 1021.0p) x $2 per penny stake
  • Profit / loss = -38.3p x $2 per penny stake
  • Profit / loss = -$76.60 loss

Note: Xstrata Rolling Daily price correct as of 18-Jun-10.

With Futures Contracts in the form of CFDs and Financial Spread Trading you can lose more than you initially invested. CFD Trading and Financial Spread Trading are leveraged products and carry a high level of risk to your capital. Ensure that leveraged products match your investment objectives. Familiarise yourself with the risks involved. Where necessary, seek independent advice.