Many Australians have been interested in the Futures market lately. It is an exciting financial instrument to add to your portfolio, but you must understand the risks involved. The Australian Securities and Investments Commission (ASIC) has warned against dangers in futures trading in Australia.
In Australia, there is a little history of people engaging in futures trading, but it seems like this may change due to the high demand for such products overseas at the moment. Australia’s financial service regulators, including ASIC and ASX, are trying to raise awareness of these risks among consumers and small businesses who might be thinking of entering the market.
Futures trading is a contract aimed at fixing the price of an asset on a particular date in the future. However, there are significant risks involved with this type of financial product, which you need to know before entering into any futures contracts.
These contracts allow you, traders, to make gains from falls in price as well as falls – by either going short or long on a future contract. Australia’s securities regulator states that if your position moves against you and becomes unlimited – you will have to pay more money than you initially invested if losses continue to pile up. Futures can also result in complete losses, depending on how much money was put into them as security. The margin required varies according to individual brokers, but it’s best to expect an amount considerably higher than the actual value of the futures contract.
Margin is different from leverage, which you can use when trading, allowing you to open up a position with only a fraction of the total value required if you were opening it on your own.
Another problem with futures is that they are highly transparent, meaning their prices are easily accessible by everyone at any time who has access to the internet – unlike other investment products like managed funds which are not as readily available for scrutiny. In contrast, some tend to operate under wraps for decades before getting exposed (such as Bernie Madoff’s Ponzi scheme). This means that traders can get ‘future shock’ by seeing what other traders are doing and moving in line with them. At the same time, brokers and dealers can see what you’re doing – which means that they may try to take advantage of your inexperience by imposing higher margins or offering worse prices than you could get elsewhere.
When trading futures contracts, you also need to be aware that it’s not just the Federal government and ASIC watching out for investors’ best interests when picking a broker, as state-based authorities such as NSW Fair Trading and others in Victoria and Queensland require them to be registered.
You do have to pay fees for this registration, but even so, ASIC says there are still some unlicensed operators who will offer their services for free to lure inexperienced traders in before ripping them off. However, it is worth pointing out that while all this seems like a lot of work, Australia’s financial regulators have taken great strides in recent years to better protect the interests of retail investors against those who would seek to take advantage of them.
If you are interested in futures trading in Australia or other innovative investment products and services that may not be widely available in your country (such as binary options), make sure you only deal with fully licensed brokers. Audited companies that comply with ASIC’s Corporate Governance principles – otherwise, you’ll be exposing yourself to unnecessary risk.