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On any day that profits accrue on your open positions, the profits will be added to the balance in your margin account. On any day losses accrue, the losses will be deducted from the balance in your margin account. If and when the funds remaining available in your margin account are reduced by losses to below a certain level--known as the maintenance margin requirement--your broker will require that you deposit additional funds to bring the account back to the level of the initial margin.

Requests for additional margin are known as margin calls. Assume, for example, that the initial margin needed to buy or sell a particular futures contract is $2,000 and that the maintenance margin requirement is $1,500. Should losses on open positions reduce the funds remaining in your trading account to, say, $1,400 (an amount less than the maintenance requirement), you will receive a margin call for the $600 needed to restore your account to $2,000.

And, of course, if you intend to trade your own account, such an understanding is essential. Dozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. Here is a brief description and illustration of several basic strategies. Buying (Going Long) to Profit from an Expected Price Increase Someone expecting the price of a particular commodity or item to increase over from a given period of time can seek to profit by buying futures contracts.

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Because of leverage, the gain or loss may be greater than the initial margin deposit. For example, assume it's now January, the July soybean futures contract is presently quoted at $6. 00, and over the coming months you expect the price to increase. You decide to deposit the required initial margin of, say, $1,500 and buy one July soybean futures contract.

40$ 2,000 * For simplicity examples do not take into account commissions and other transaction costs. These costs are important, however, and you should be sure you fully understand them. Suppose, however, that rather than rising to $6. 40, the July soybean futures price had declined to $5. 60 and that, in order to avoid the possibility of further loss, you elect to sell the contract at that price.

Instead of first buying a futures contract, you first sell a futures contract. If, as expected, the price declines, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price.

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In the hope of profiting, you deposit an initial margin of $2,000 and sell one April live cattle futures contract at a price of, say, 65 cents a pound. Each contract is for 40,000 pounds, meaning each 1 cent a pound change in price will increase or decrease the value of the futures contract by $400.

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Spreads are one example. A spread, at least in its simplest form, involves buying one futures contract and selling another futures contract. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other. As an illustration, assume it's now November, that the March wheat futures price is presently $3.

15 a bushel, a difference of 5 cents. Your analysis of market conditions indicates that, over the next few months, the price difference between the two contracts will widen to become greater than 5 cents. To profit if you are right, you could sell the March futures contract (the lower priced contract) and buy the May futures contract (the higher priced contract).

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15 Bu. 5 cents, February, Buy March wheat, Sell May wheat $3. 20 $3. 3515 cents $ . 10 loss$ . 20 gain Had the spread (i. e. the price difference) narrowed by 10 cents a bushel rather than widened by 10 cents a bushel the transactions just illustrated would have resulted in a loss of $500.

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These, however, are beyond the scope of an introductory booklet and should be considered only by someone who well understands the risk/reward arithmetic involved. Now that you have an overview of what futures markets are, why they exist and how they work, the next step is to consider various ways in which you may be able to participate in futures trading.

That is, they manage their own futures trades in much the same way they would manage their own stock portfolios. Others choose to rely on or at least consider the recommendations of a brokerage firm or account executive. Some purchase independent trading advice. Others would rather have someone else be responsible for trading their account and therefore give trading authority to their broker.

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