If you have ever monitored the price of oil, you know that it can fluctuate between specific ranges. As an investor, you may be able to take advantage of those swings by speculating in the space. One way to do this is by using oil futures. It may be another way that you can diversify your portfolio and create more profits.
Understanding Oil Futures
The first concept that you must understand about oil futures is that it is a financial derivative. If you’ve been involved with financial markets, you’ve probably heard of this term. A derivative is a type of security that links with another security, and just like their name states, they derive their value based off of their link to a primary security. Without that link, derivatives are worth nothing. In the case of oil, the derivative that is used is a futures contract. Traditionally, futures have been used so that you could purchase or sell a commodity such as oil.
One of the key reasons why you may want to invest in oil futures is the potential to make high profits. Some people have benefited by using oil futures in their investment portfolio and have made 4 to 6 figures in just one trade. Futures give you this capability since oil’s price per barrel can significantly change in just a few hours. If you are long oil futures and the price of oil jumps due to a positive news development, you’d be able to take advantage of that sudden burst in value and sell for a profit. However, high rewards often come with high risk — you can also lose money fast if you don’t know what you’re doing when you try to trade oil futures.
Opening A Futures Trading Account
With the advent of online trading, you now have the ability to open an account and trade oil futures. Be aware that you will be competing against other online traders as well as institutional investors. To open an account, you will need to search for a futures brokerage firm. When you find a few, you’ll need to decide if you want to use an account that is broker-assisted or one that is self-directed by you. A broker-assisted account will include the ability to talk to a professional who understands the ins and outs of oil futures trading. You are on your own and make decisions by yourself if you choose a self-directed plan.
Minimum Amounts and Margin
To open a futures trading account, you’ll also be required to deposit a minimum amount of cash. Brokerages have different requirements so compare each option to see which plan is best for you. In addition to minimum amount requirements, brokerages that handle futures trading will also have different margin requirements that need to be met when you take a position in an underlying derivative. Be sure to compare these rates as well.
Practice With A Demo Account
Before you begin trading oil futures with real money, it’s best to come up with a strategy that works. Analyze all of your trades to determine tactics that work and eliminate any problems that you discover. By taking the time to trade with a demo account, you can experiment and learn which strategy is best for you. Some futures trading accounts will allow you to trade with as little as 5 percent of the total value of the amount that you are trading. As an example, if you want to purchase $100,000 of oil futures, you would only need to spend $5000 to do so. That leverage can get you into trouble fast if you don’t have the proper strategy to manage your trades. Be smart and figure out that strategy before using live ammo.
As you can see, you can invest in oil futures by following a few steps. However, you’ll want to take time learning about strategies, trading and how this investment option works best for you.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!