All you need to know about trading in oil futures

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The world of market investments is rather complex and goes beyond basic investments like buying and selling shares, mutual funds, government bonds and other similar money market investments. Advanced traders deal in several different types of futures and options contracts. Futures contracts essentially refer to a type of derivate contract under which investors and traders agree to buy or sell a predetermined quantity of an underlying asset at a predetermined price on a fixed date in future. This type of contract helps the investor evade the risks associated with the fluctuation of the price of the underlying asset. Here’s all you need to know about oil futures.

What are oil futures and how to trade in them?

As we all know, every economy needs crude oil to keep functioning smoothly. Wars are waged and countries are annexed for the sake of their oil resources. As such, oil is a rather crucial resource that can contribute to the boom or slowdown of an economy. This is the reason why entering in crude oil trade in options and futures is legitimised by governments across the world.

Crude oil futures are extensively used by countries and large corporations in order to hedge against the volatility in price. The prices of these futures can increase and decrease based on their movement in the spot markets and the demand and supply. For example, if countries supplying oil feel that the oil resources are fewer but the demand is high, the prices of oil will increase in future, which, in turn, leads to the hike in price in the spot market. On the other hand, when there are excessive oil resources and lower demands, the chances of oil pricing falling are higher in the spot market.

Why are oil futures essential?

Oil futures are typically essential because they involve large quantities of this commodity. Most countries across the globe depend on oil imports to ensure that their economy is functioning smoothly. In the event that oil prices are hiked, countries importing this resource have to pay large amounts of money to the oil exporting country, which can put a strain on the importer’s financial health. As such, countries must rely on oil commodity futures heavily in order to hedge against the rising prices of oil. Apart from hedgers, speculators also stand a chance to profit from the movements in price, while trading in different types of futures contracts, including oil.

Trading crude oil futures in India

Indian investors interested in trading in oil futures can do so, on the Multi Commodity Exchange (MCX). Trading in oil is very popular in the commodity trading community since both, margins and lot sizes of these trades are small. As an investor, you may be required to pay a very small margin; typically under 5% to trade in oil. This gives you the opportunity to exercise considerable leverage. For instance, if you wish to conduct a trade worth ₹5,000,000 you only need to deposit a margin of ₹250,000. Moreover, the crude oil market is highly liquid with trade worth ₹10,000 to ₹15,000 Crores taking place on a daily basis. As such, you will have no trouble in buying or selling futures if you choose to do so.

Final word: Apart from oil, you can also trade in various other types of futures which include commodity futures, currency futures, index futures, and stock futures. Futures contracts can be used by investors to hedge the movements of prices of the underlying assets and prevent losses from occurring, especially if the changes in prices are not in the favour of the investor.

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