How to become a trader: first steps

You can trade something tangible, for example, shares, bonds, currencies and even cryptocurrencies. One thousand dollars under your pillow or one hundred Sberbank shares in your bank safe pleasantly warm your soul.

However, you can also trade intangible financial instruments or derivatives. When trading derivatives you just have the right to buy an underlying asset in future at the price, which is fixed today. Anything could be an underlying asset: currency, commodity, interest rates, indices and even weather.

The most simple and popular derivative is a futures contract.

A futures contract is an exchange contract for buying or selling an asset on a certain day in future at the price, which is fixed today. For example, two farmers can fix the price, at which one would sell wheat to the other after the harvest, in spring.

The goals of using futures are:

• getting a speculative profit, that is, buy low and sell high;
• insuring (hedging) changes of the cost of the underlying asset in future. For example, a manufacturer executed a contract for shipment of rubber boots to the US in 3 months with the payment in USD. One USD is RUB 68.5 today. If its value goes up to RUB 70, the manufacturer will make additional RUB 1.5 (70-68.5) for each pair of rubber boots. But if a dollar costs 65 rubles in three months, the manufacturer will lose RUB 3.5 (68.5-65) for each pair. Manufacturers like stability, that is why, their financial services sell USD/RUB futures, insuring risks but depriving themselves of additional profit. If the dollar grows, the manufacturer makes profit on selling boots, but will lose on the futures and vice versa.

There are two types of futures:

• delivery futures, which envisage delivery of an underlying asset on expiration of the contract;
• settlement futures, which envisage financial settlement on expiration of the contract without delivery of the underlying asset.

Both types of futures contracts are rather popular in the markets – for example, there could be both delivery and settlement futures on commodities and stock, however, there could be only settlement futures on interest rates or weather, since nobody can deliver weather. Traders prefer settlement futures since their goal is a speculative income, since nobody wants to store barrels of oil or piles of cotton at home.

There is no need to pay for the underlying asset in order to execute a futures contract. You just need to provide a guarantee collateral, which is just a small part of the current price of the underlying asset (it is 8-12% on the Moscow Exchange). Both futures seller and buyer should provide this collateral.

Main platform for trading futures in Russia is the forward market FORTS of the Moscow Exchange.

The main world platform for trading futures is the Chicago Mercantile Exchange (CME). They trade more than 90 futures on CME and more than 50 of them are on the world currencies: EUR, CHF, GBP, JPY and others.

There are the following advantages of trading futures:

• Low guarantee collateral (guarantee collateral of a EUR/USD futures on MOEX is RUB 3,238, while the underlying asset cost is USD 1,164; guarantee collateral of a EUR/USD futures on CME is USD 2,300 for intraday trading of 500 contracts, while the underlying asset cost is USD 125,000);
• Possibility of active trading without a big initial capital. Nearly all brokers offer a credit leverage of 1:250 for intraday trading, which means that you can have USD 2,000 on your account only to trade the amount of up to USD 500,000;
• High liquidity, which means that you can sell or buy futures immediately.

As of today, the majority of exchanges carry out trading with the help of unified systems of electronic trading, which allows trading without leaving home. However, pursuant to the legislation, a common person cannot trade on the exchange directly, he needs to use services of an intermediary – a broker.

The procedure of beginning to trade is nearly the same in all cases: you need to select a brokerage firm, open an account and start trading.

Each exchange provides a list of its brokers:

https://www.moex.com/en/ – PAO Moscow Exchange;

https://investcab.ru/ru/inmarket/connect/ – Saint-Petersburg Exhange;

https://www.cmegroup.com/tools-information/find-a-broker.html#pageNum=1 – Chicago Mercantile Exchange.

You should select a broker based on the following parameters:

1. Working experience;
2. Licence availability;
3. Risk insurance and responsibility;
4. Low service and commission tariffs;
5. Minimum deposit amount;
6. Availability of several trading terminals with different technical functions;
7. Variety of trading instruments;
8. Availability and working hours of the support service, which you can easily contact;
9. Speed and convenience of cash withdrawal;
10. Small print traps and pitfalls in contracts.

Trading on foreign exchanges (for Russian people) is connected with significant difficulties and expenditures than trading on Russian exchanges (costs of contracts and guarantee collateral are much higher). There are several variants:

• Use services of a foreign broker. Only several firms (for example, Interactive Broker) work with the Russian Federation (support and documentation are in English). It will be impossible to visit the brokerage firm office personally. Minimum cash deposit starts from USD 10,000.
• Use services of a Russian broker that provides access to foreign exchanges (NYSE, LSE, CME and others). The broker does not provide access to the whole list of traded instruments, that is why you have to make sure beforehand that those futures that you want to trade are in the list of the instruments the broker offers.
• Use services of a Russian broker who has access to the Saint-Petersburg Exchange, where foreign company stocks are trades. You should understand that the stock liquidity and number of companies on the Saint-Petersburg Exchange are lower that on foreign exchanges.