This used to be the most popular method used by traders (in fact it used to be the only way). Over recent years it has declined in popularity slightly due to the rise of other different types of bets available.
So how do futures work? Well the initial concept was invented centuries ago as a way of protecting the purchaser and the seller from volatility in the spot price. The spot price is the current market price.
By taking out a futures contract you knew the price that you were going to pay for a particular commodity many months in advance.
Then traders started to enter the market as it allows them access to different types of classes of assets without having to take delivery of the physical asset. This market still exists to this day and you can take advantage of it through financial spread betting.
So how are the futures prices determined? Well as you can imagine that the spot price is a major factor of valuing the futures contract. If the spot price is higher then futures price is likely to be higher too. As well as the spot price you need to consider the ‘cost of carry’.
As you aren’t paying the full amount up front, you only pay the margin requirement, the current interest rate is a determining factor of the futures price. The higher interest rate, the higher the price of the futures contract.
Specifically in the case of stocks, any potential dividend payment affects the price and if you are going long (buying) you can get the contract at a better (cheaper) price.
As with anything financial spread betting related there is a spread. You need to consider the spread of the futures market as well as that added by your financial spread betting company.
