If you are bullish on soybeans, you can profit from a rise in soybeans price by taking up a long position in the soybeans futures market. You can do so by buying (going long) one or more soybeans futures contracts at a futures exchange.
You decide to go long one near-month CBOT Soybeans Futures contract at the price of USD 9.6900 per bushel. Since each CBOT Soybeans Futures contract represents 5000 bushels of soybeans, the value of the futures contract is USD 48,450. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 4,725 to open the long futures position.
Assuming that a week later, the price of soybeans rises and correspondingly, the price of soybeans futures jumps to USD 10.66 per bushel. Each contract is now worth USD 53,295. So by selling your futures contract now, you can exit your long position in soybeans futures with a profit of USD 4,845.
|Long Soybeans Futures Strategy: Buy LOW, Sell HIGH|
|BUY 5000 bushels of soybeans at USD 9.6900/bu||USD 48,450|
|SELL 5000 bushels of soybeans at USD 10.66/bu||USD 53,295|
|Investment (Initial Margin)||USD 4,725|
|Return on Investment||102.5397%|
In the examples shown above, although soybeans prices have moved by only 10%, the ROI generated is 102.5397%. This leverage is made possible by the relatively low margin (approximately 9.7523%) required to control a large amount of soybeans represented by each contract.
Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.
To buy or sell futures, you need a broker that can handle futures trades.
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