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Learn How Futures Trading Works

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Futures are a kind of contract that guarantees the delivery of a certain amount of a product or commodity at a certain time in the future at a certain price. These products include tangible goods, such as corn, gold, oil and pork bellies, as well as intangible products, such as currency and stock indexes.

Here’s how futures trading works and what you need to know before diving in.

What is futures trading?

Futures trading is an agreement between a buyer and seller to exchange a good in the future for a preset amount of money. The buyer agrees to pay the cash at the future date, and the seller promises to deliver the product at that time. This point is important — with a futures contract, the buyer is agreeing to take delivery of the commodity, and sometimes taking delivery of that product (such as oil, cattle or sugar) requires a lot of physical infrastructure.

Futures trading usually is the province of highly sophisticated participants, often those who use the commodity or product being traded. But it also includes traders who simply speculate on the price movement of the futures.

Key players

The key players in the futures markets include:

  • Commodity producers and users: These players are buying or selling futures to hedge their bets on a commodity’s price. They use or produce the commodity and want to guarantee a sale at a set price of part or all of the commodity. In this way, they reduce their risk and lock in a price in an often-volatile market. They either deliver the quantity of the commodity or take delivery of it.
  • Speculators: These players are purely bettors, placing their chips on how they think a commodity is going to move. They’ll never take delivery of a physical commodity and will close their position before the delivery date.
  • Other hedgers: These players may own an investment that is exposed to a commodity, so they buy or sell futures to hedge or protect their other investment.

These three groups consist of companies in the given commodities industry, individual and professional traders, and institutional investors, such as pension funds, hedge funds and others.

Top futures exchanges

These traders are exchanging standardized contracts that are swapped on a futures exchange. In the U.S., many of the top futures exchanges are run by CME Group, including the following:

  • Chicago Mercantile Exchange (CME): offers contracts on many agricultural products as well as those on financial products
  • Chicago Board of Trade (CBOT): noted for its exposure to agricultural commodities
  • New York Mercantile Exchange (NYMEX): specializes in energy futures
  • Commodity Exchange (COMEX): noted for its metals futures

Commodities trading is regulated by the U.S. Commodity Futures Trading Commission (CFTC). The CFTC oversees not only commodities futures (such as for corn and soybeans) but also futures for financial products (such as for currency and stock indexes).

Futures contracts explained

Because they’re standardized, futures contracts specify everything a trader should know about the contract.

They’ll specify the following things:

  • The amount in each contract and the unit (bushel, barrel, ounce, etc.)
  • The currency unit the price is quoted in
  • The delivery date
  • How the trade will be settled — either physical delivery or cash settlement

Futures contracts were created to minimize the risk of price fluctuations in a commodity, so companies that need and produce the commodity can access the market and lock in a future price today. Let’s run through an example to get a sense of how a futures contract plays out.

Imagine a cereal manufacturer needs to ensure a supply of corn at a reasonable price over the winter, avoiding a potential shortage and a subsequent price spike. This producer buys 200 contracts to take delivery of 1 million bushels of corn in December of the following year, 15 months out.

On the other side of the contract is a corn producer — an agricultural giant that wants to be sure it gets a fair price for 2 million bushels of its corn next December to avoid an oversupply and unexpectedly lower prices due to a good harvest. It sells contracts on 1 million bushels to the cereal maker and the remaining contracts to various other buyers.

In this example, both parties can benefit by trading some risk, with each locking in future prices at a price that looks good today. Of course, a speculator may jump into the market, expecting the price of corn to rise, and buy corn futures too, maybe buying some from this corn producer. This speculator may sell them later to the cereal maker if it wants to secure more corn.

Regardless of who buys and sells the futures contracts, both buyer and seller must put up a portion of the contract’s value called margin, typically 3% to 12%. This margin is held by the futures clearinghouse as a security on the contract. As the value of the contract fluctuates over time, the parties to the contract may have to add money to the margin to maintain the contract.

After each trading day, the clearinghouse settles the daily accounts between the buyer and seller. If the contract increased in value, it transfers the increase in cash from the seller’s margin account to the buyer’s, and vice versa if the stock fell. If either the buyer or seller falls below the minimum margin level required by the clearinghouse, they’ll have to deposit more money.

Finally, when the delivery date arrives, that’s when the buyer and seller settle up the contract. The buyer will pay the agreed amount, and the seller will deliver the fixed quantity of goods. It’s important to reiterate that a buyer may be agreeing to take physical delivery of goods for commodities in the future or to settle accounts in cash with financial products.

Types of futures markets

There are two broad kinds of futures markets: commodities futures and financial futures. Here are some major products that are exchanged in each.

  • Commodities futures: These commodities consist of the following categories:
    • Metals (including gold, silver, platinum)
    • Agriculture (including corn, soybeans, coffee, cotton, sugar, wheat)
    • Energy (including oil, gasoline, jet fuel, natural gas)
    • Livestock (including hogs, pork bellies, cattle)
  • Financial futures: These products consist of the following categories:
    • Foreign exchanges (including contracts that de-risk currency fluctuations)
    • Indexes (including contracts covering the S&P 500)
    • Interest rates (including swaps of interest payments)
    • U.S. Treasury futures (including contracts on U.S. debt)

There are many other kinds of commodities and financials traded on the exchanges.

How to trade futures

It can be relatively easy to get started trading futures, though it pays to quickly educate yourself before wading in too deep. Many discount brokers offer futures trading — including the larger full-service brokers — but more specialized futures brokers also are available.

In addition to the usual personal information, the broker will ask you questions about your income and assets to gauge how much risk you will be allowed to assume.

While a broker may have a low account minimum to open an account or none at all, that doesn’t mean that you’ll be able to trade immediately if you deposit the minimum. Each futures contract has its own minimum initial margin, depending on the broker. Often that minimum is a few thousand dollars, so you’ll need at least that amount to get in the game. And then if the contract moves too much against you, you’ll have to deposit more cash to maintain it.

For example, if you’re in the market for an E-mini futures contract on the S&P 500, you’ll need at least $6,600 at one broker to open a contract. Once you have an open position, the broker gives you a bit of wiggle room to hold the contract. As long as your account has at least $6,000 in value (the contract plus any cash), you’re in good standing. When it dips below that amount, the broker will call on you to immediately deposit cash to make up the deficit or sell the contract.

If you’re unable to obtain the ability to trade futures directly, it’s possible to buy exchange-traded funds (ETFs) that give you exposure to commodities futures. These ETFs often are categorized by commodity type (gold, oil, etc.), and some even offer leveraged exposure to the price of the commodity. Plus, you can make a bet on either the upward or downward move of the commodity. There are at least 100 commodity ETFs trading in the market. A sugar ETF? Yes, there is.

What are the risks of futures trading?

There are two major risks in trading futures, especially commodities futures: price volatility and leverage. Traders like the leverage and price volatility of commodities because they have a chance to profit very quickly, but there is a risk of losing a lot of money just as quickly. Savvy traders avoid exposing themselves to too much risk in any one position.

Here’s what you should know about each one.

Price volatility

Commodity prices can fluctuate a great deal, often in response to unexpected factors, such as catastrophic weather or natural disasters (hurricanes, earthquakes) or more mundane events (an extra long winter or a rainy summer). And commodities may fluctuate for no reason at all or merely because some speculators run the price up or down.

Leverage

Using a margin account, commodities exchanges allow traders to put up only a portion of the contract’s value in order to own it, giving the trader leverage. In other words, this practice allows traders to own more contracts than they have the money for currently. So this leverage allows a small amount of money to control a much larger amount of money.

As long as the trade moves in the trader’s direction (increasing in value), the trader won’t have to deposit more money into the margin account. However, if the contract decreases in value enough, the trader must put more money into the account or otherwise sell the contracts. It’s possible that a volatile price swing (see point No. 1) could lose more than the trader initially invested. If you can’t meet the margin call on a timely basis, the brokerage will sell enough to do it for you.

Is futures trading right for you?

Trading is tough, and it’s even tougher in commodities markets than in (slightly) more predictable arenas, such as the stock and bond markets. The price of commodities can fluctuate violently sometimes, and the leveraged nature of futures contracts can force a futures trader to put up substantial cash just when it’s in short supply.

Individuals often don’t have enough information to compete with well-informed institutional and professional traders. These pros know their specific markets thoroughly and have information flow that may never be reported in traditional news outlets. If a big institution decides to move, it can shift the whole market, and small individual players are forced along with it.

Traders in any market — but perhaps especially in the futures markets — need to have strong risk management. They should understand when to close a position, especially a losing position, so they don’t risk a catastrophic loss. Psychologically, that’s one of the toughest things to do, but it’s the most important because it limits the damage to your bankroll from any one trade.

Bottom line

Futures trading can be tough for a new trader, and it requires a higher level of sophistication and trading acumen than stock investing. But it’s popular because the leveraged nature of futures contracts makes possible a rapid gain on a small change in the commodity’s price. Of course, it’s just as easy to lose money on a small downtick in price too.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
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James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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Investing

SoFi Active Investing Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Well known for its lending business, SoFi has branched out more recently into investing products. SoFi Active Investing is the company’s online brokerage product, providing a platform for users to invest in individual stocks and exchange traded funds (ETFs).

SoFi Active Investing offers very limited choices for investing, and should be considered a product for people who want to learn the basics. That said, this platform’s biggest hook makes it a very attractive choice for investing beginners: it charges zero transaction fees. In addition, you can get started buying fractional shares of stock with as little as a $1, and it provides great educational resources.

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The bottom line: SoFi Active Investing provides beginners with easy-to-use online brokerage that helps them invest in stocks and ETFs, and learn about the market.

  • Invest in a variety of stocks and ETFs, including fractional shares.
  • Create a personal watchlist and get real-time investing news and data.
  • Get access to other SoFi membership benefits, including rate discounts and community events.

Who should consider SoFi Active Investing

SoFi Active Investing is best for beginners who would like to gain hands-on experience in trading individual stocks. Fractional investing through the Stock Bits feature can be a very useful tool, since you can buy a small piece of a more expensive company for as little as $1.

While best suited for beginners, intermediate and even advanced traders can benefit from using SoFi’s brokerage account. SoFi doesn’t charge trading commissions like most other online brokers. More active traders can benefit from using this product and save money on fees, rather than needing to pay each time an order is executed.

Note that investors who are more focused on long-term goals and want a more hands-off approach to their portfolio might look at SoFi Automated Investing, the company’s robo-advisor platform. This SoFi product takes care of the heavy lifting for investors by offering a selection of ETF portfolios.

SoFi Automated Investing fees and features

Amount minimum to open account
  • $100 one-time deposit or $20 monthly deposit
Tradable securities
  • ETFs
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
Ease of use
Mobile appiOS, Android
Customer supportPhone, Email, 4 branch locations

Strengths of SoFi Active Investing

  • No transaction fees: While any ETFs you choose come with expense ratios, there are no transaction fees, even for trading individual stocks. You can expect to pay $4.95 (or more) at several more traditional brokerages. Robinhood is one of the few other brokers that doesn’t charge transaction fees.
  • Access to fractional shares: If you don’t have enough money to purchase a full share of stock, you can purchase fractional shares of select stocks for as little as $1.
  • Invest up to $1,000 instantly: If you have a linked bank account, and meet certain requirements, you can invest instantly, without waiting about four business days for funds to clear.
  • SoFi membership bonuses: When you open a SoFi Active Investing account, you become a SoFi member and get access to certain bonuses. These bonuses include things like rate discounts on other products, as well as invitations to exclusive events and networking opportunities.

Drawbacks of SoFi Active Investing

  • Cash balance doesn’t earn interest: The money you have sitting in the cash balance portion of your SoFi Active Investing account doesn’t earn interest. Some other brokers will pay a small amount of interest on cash that hasn’t been invested yet.
  • Not every stock comes with fractional investing: While it’s possible to buy fractional shares, the list of stocks where this is possible is limited. Not every stock comes with the ability to purchase fractional shares. SoFi updates its list of Stock Bits based on demand.

Is SoFi Active Investing safe?

SoFi Active Investing is as safe as any investment. It is important to understand that anytime you invest, you are putting your money on the line and you could lose it — this is true no matter what broker you use.

However, SoFi offers its account under SoFi Securities LLC, a broker registered with the Securities and Exchange Commission (SEC). Additionally, SoFi carries SIPC insurance, which is designed to protect investors if the broker fails. Realize, though, that the SIPC won’t protect you from economic and market events — those losses are entirely yours.

SoFi is also regulated by the Financial Industry Regulatory Authority (FINRA), which helps keep your investments safe. Before investing, it’s a good idea to use resources like FINRA’s BrokerCheck to see if there are problems related to any broker. Additionally, you can look at the Better Business Bureau to see if there are complaints against an investing company.

Final thoughts

SoFi Active Investing is a good choice for beginners who want to start active trading. It’s possible to invest in individual stocks and fractional shares without paying transaction fees. You can open an account fairly easily, and when you link a bank account, you can invest instantly.

There are other brokers, like Robinhood, that provide access to individual stocks without high costs, and if you don’t trade very frequently, established brokers like Charles Schwab and Ally Invest can be good choices, even with transaction fees.

However, it’s important to note that SoFi is relatively new to the investment space, and you might not have access to some of the tools commonly available with more established brokers. Additionally, if you’re not sure that you’re ready for active investing, it can make sense to start with a robo-advisor. SoFi’s Automated Investing product might be a good choice, or you might consider another well-known investment product, like Ellevest, Wealthfront or Betterment.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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Investing

M1 Finance Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

M1 Finance is an online investing platform that combines robo-advisor functionality with certain features more typically found on conventional broker platforms. This makes M1 Finance a somewhat unique product: It offers curated investment portfolios for different goals and risk tolerances, together with the ability to build your own investment portfolios.

No matter which way you choose to compile your investments, M1 Finance lands squarely in the robo-advisor camp, as it manages them for you automatically and handles all the necessary rebalancing. M1 offers taxable, trust and retirement accounts, and users can open up to five accounts under one login. Best of all, M1 charges no annual management fees.

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The bottom line: This highly customizable robo advisor is a good option for investors who have gotten beyond the beginner stage, as well as more experienced investors.

  • Build your own investment portfolios choosing from an array of stocks and exchange traded funds (ETFs)
  • M1’s curated investment portfolios give you preset options
  • Robo-advisor technology and dynamic rebalancing keep your investments on track

How does M1 Finance work?

M1 Finance refers to investment portfolios as “pies,” and the different stocks and ETFs added to each portfolio “pie” as “slices,” which you may find either charming or goofy. When you sign up with M1 and choose your first pie — one designed by M1, one with “slices” you’ve selected yourself, or a mix of the two — the platform shows you how it would have performed over the last 10 years (this is called a “backtest” in the professional investing world).

After establishing a portfolio “pie,” you complete a quick series of questions about yourself, including income, net worth, liquidity, and investment time horizon. M1 then asks you to link up a bank account to fund your investments. Once linked, you can fund your first pie, and may choose more portfolio pies.

If you decide to build your own portfolio pies, you can choose from more than 4,000 individual stocks and more than 1,900 ETFs. Each pie can hold up to 100 slices. M1 requires a minimum balance of just $100, and charges no fees to manage your portfolios. M1 makes its money from interest on cash deposits, interest on margin loans, and through the annual fee on their optional M1 Plus membership, among other things.

For users who want the platform to choose investments for them, M1 Finance offers curated pies, from target retirement portfolios (sorted by conservative to aggressive) to socially responsible investing portfolios. There’s even a “Cannabis Pie” that offers exposure to publicly traded cannabis producing, manufacturing and distributing companies.

Who should consider M1 Finance

M1 Finance has features that would appeal to both journeymen and more experienced investors. The latter will like the build-your-own portfolio option, while all users will appreciate curated portfolios based on things like your target retirement date or your desired mix of stocks and bonds. If you feel comfortable choosing your investment approach, you can set up automatic investments that will fund your account over time.

For true beginners, the M1 platform might be a little too DIY. Although you can choose from the site’s pre-selected investment mixes, there are no recommendations based on your time horizon or other measures — you’re on your own to select one. If you need help, there are no advisors available, as with some other robo-advisors — you must submit a support request via contact form.

M1 Finance fees and features

Current promotions

Current M1 clients get $25 off their first year of M1 Plus, M1's premium product.

Stock trading fees
  • $0 per trade
Amount minimum to open account
  • $100
Tradable securities
  • Stocks
  • ETFs
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $100 full account transfer fee
  • $100 partial account transfer fee
  • $20 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
  • Trust
Mobile appiOS, Android
Customer supportPhone, Email

Strengths of M1 Finance

  • No fees: M1 charges no fees to manage your portfolio, and requires only $100 to start investing, after which you can invest in increments of $10. There is, however, an inactivity fee if you have less than $20 in your account and there’s no activity for 90 or more days, and the site charges to close accounts: $100 for outgoing transfers, for instance, and $100 to terminate each IRA.
  • Customizable portfolios: Unlike some robo-advisors that lock you into their investment selections based on your risk tolerance, M1 Finance gives you a lot of leeway. You can select your own stocks and funds you’d like to go into your investment pie, or you can go with one of the site’s professionally curated pies, such as “Moderately Aggressive” or “Responsible Investing.” You can also choose a combination of the two approaches, filling part of your pie with your picks and part of your pie with theirs.
  • Fractional shares: M1 allows investors to buy fractional shares of stocks and funds, so every dollar you point toward your portfolio will be used when you purchase investments.
  • Rebalancing: Using a method it calls Dynamic Rebalancing, M1 will rebalance your portfolio as you deposit and withdraw cash, and the site will reinvest your dividends once your cash balance reaches $10, or whatever threshold you’ve chosen.
  • Additional features: With M1 Borrow, users with accounts with a balance of at least $10,000 can borrow up to 35% of their portfolio at 4.25%. M1 Spend allows users to keep cash in a checking account, and if you sign up for M1 Plus for $125 a year (currently on special for $100), you’ll earn 1.5% APY on your cash.

Drawbacks of M1 Finance

  • Too much freedom: Unlike most robo-advisors, which typically recommend pre-baked investment portfolios for you based on your answers to questions about goals and risk tolerance, M1 lets you invest in whatever you want. This could be bad news if someone loads up their portfolio with stocks without doing any research, or might be overwhelming for an investor who wants more hand-holding.
  • Not much guidance: The site’s setup includes questions like, “What is your liquid net worth?” without any explanation for beginners about what that might mean. The site also asks users to rate their risk tolerance — low, medium, high — without any accompanying details. Many other robo-advisors provide greater amounts of background detail on the investing process, and offer more advice for novice investors.
  • Not for day traders: M1 makes trades just once every day, during the “trading window,” at 9 am Central Time. If you’re looking to capitalize on daily stock price fluctuations, this may not be your ideal platform.
  • No tax-loss harvesting: Although M1 uses a tax minimization strategy to reduce the taxes you owe when you sell securities, there is no tax loss harvesting offered. When you request a withdrawal from your account, an algorithm sells securities in the order of: losses that offset future gains, lots that result in long-term gains, and then lots that result in short-term gains.

Is M1 Finance safe?

M1 Finance has all of the typical protections in place. It is a registered broker/dealer with the Financial Industry Regulatory Authority (FINRA), a member of the Securities Investor Protection Corporation (SIPC) and carry SIPC insurance that protects against the loss of cash and securities held by a customer up to $500,000. They also have supplemental SIPC insurance, and M1 Spend and M1 Plus accounts are FDIC insured up to $250,000.

M1 has also taken measures to protect personal information. Your data is never stored on any device, and all information is encrypted in transit and at rest. The connection to your bank is managed via an electronic key — M1 doesn’t store your bank credentials.

Final thoughts

M1 Finance offers features that will appeal to both experienced and beginner investors, from highly customizable portfolios to pre-set investment mixes that users can set on auto-pilot. Although there’s not much guidance on the site, users can open an IRA, choose a target date retirement mix, set up automatic investments and they’re set — or they can fill a portfolio with 100 individual stocks and ETFs of their choosing. With no management or trading fees, users are paying just the expenses on the investments themselves, and you can invest as little as $10 at a time. Compared to other robo-advisors charging higher fees and offering fewer investment options, there’s a lot to like here.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kate Ashford
Kate Ashford |

Kate Ashford is a writer at MagnifyMoney. You can email Kate here