Futures Trading – Top 5 Best Online Brokers for Trading Futures

RankNameCommissionsRatingMore Info
1TDAmeritradeStock: $9.99
Options: $9.99 + $0.75/contract
3SogotradeStock: $3.00
Options: $5.00 + $0.65/contract
5ETradeStocks: $9.99
Options: $9.99 + $0.75/contract

What is Futures Trading?

The official financial definition of Futures Trading is the trading of standardized contracts between two parties to buy or sell a specific asset (Commodity, Financial Instrument, Market Index, etc) at a specified future date at a price agreed on today. Now this may seem a bit complicated, but in reality it’s a lot simpler than it sounds. Let’s say that you believe the price of Oil will increase. You can open an account with any of the online futures brokers above and purchase Futures contracts for Crude Oil. Each futures contract for oil is “standardized” to make trading streamlined. A single futures contract for Crude Oil (Trading Symbol CL) represents 1,000 U.S. Barrels (42,000 Gallons) of oil. Because most online futures brokers offer their clients plenty of margin, investors do not need to put up the entire price of the underlying asset (In this case the market price of 1,000 barrels of oil). Many online futures brokers allow investors to begin trading with as little as $2,000, with some specialized futures brokers having no minimum account requirements. By purchasing a single futures contract for Light Sweet Crude Oil, an investor receives the full benefit or price appreciation, but also the losses related to depreciation.

Futures Trading on Margin
Since trading is done on Margin, your online broker will never let you lose more money than you have deposited in your account. With a single Light Sweet Crude Oil contract, and investor will gain $10 each time the price of oil increases by $0.01 and lose $10 each time the price of oil falls by $0.01. The reason for this is that a single futures contract controls 1,000 barrels of oil and 1000 x $0.01 is $10. An account opened with $2,000 which purchases a single crude oil futures contract will be wiped out if the price of oil falls $2 below the price the contract was purchased, as that would add up to $2,000 in losses. Futures trading is considered high-risk because the price of a commodity can fluctuate quite a bit each day. If the price of oil increases $4 in a single day, anyone holding a single futures contract for it would profit $4,000

These futures contracts are traded on a futures exchange. Like a stock, the price of a futures contract is determined by the forces of supply and demand. Unlike options trading, which gives the owner of the option the right but not the obligation to exercise that option, those who own futures contracts on expiration must take delivery of the underlying asset. Investors who don’t want to end up taking physical delivery of a futures contract can avoid doing so simply by selling the contract before it hits the delivery date, also known as the final settlement date.

Trading Commodity Futures
Commodities like metals (Gold, Silver and Copper), Agricultural products (Wheat, Rice, Soybeans), and energy (Oil, Natural Gas and Coal) for example are just some of the many commodities that are actively traded on Futures markets. Individual investors as well as larger firms can buy or sell futures contracts through one of the many online brokers. Futures trading can be extremely profitable for those who can accurately predict market trends, but carries much more risk than trading stocks or bonds, as most online brokers allow investors to trade futures contracts on margin – so even small movements in the market can wipe out your investment.

Futures Trading – Standardized Contracts
Light Sweed Crude Oil futures trade in units of 1,000 barrels, but not every commodity trades the same way. Gold futures which are traded on the Comex exchange are traded in units of 100 troy ounces and move up or down in increments of $0.10. A single wheat future contract represents 5000 bushels of wheat and moves up or down in increments of $0.01 at a time. Cotton future contracts on the other hand each represent 50,000 lbs net weight of cotton and moves up or down in ticks of 1/100 of a cent. The purpose of standardizing contracts is to ensure that every investor knows exactly what they’re buying or selling.

Online Futures Trading Brokers and Commissions
Like stocks and options, online brokers charge investors commissions per transaction. Comparing brokers online and comparing commissions is the best way to find the find the best brokers. Since trading stocks and futures are so different, the online broker that offers the best rates and service for stocks may not offer the best rates for futures trading, or even offer futures trading at all. With the explosive growth of the internet, discount futures brokers have popped up and commissions for trading futures have never been lower.

Interested in leaning more about futures trading? Read the resources below:

Learn More About Trading Futures Online