Investors trade silver to offset financial uncertainty. The metal is used as a haven frequently to harness the advantages of risk management methods. Next to gold, silver is the preferred choice of precious metal instruments.

You have many options to trade silver such as options, ETFs, OTC products, and futures. Silver futures helps to control risk to a level that is beneficial for you. Is this a wise choice? Here is a guide on the basics, benefits, and risks of trading the commodity.

Essential facts to know

Find below some crucial factors you should be aware of concerning trading silver using the futures method.

1. What is silver futures trading?

To know silver futures, you need to know what the term futures mean. It is a term that denotes the trading of a commodity on a specific day at present. But the product will be delivered in the forthcoming period at a particular date agreed upon by the concerned parties.

Here is a simple example of how the method works:

Consider a situation where you need to buy 2000 ounces of the metal in 8 months. The market situation indicates the rate as $12 per ounce. Due to lack of funds or some other reason, you are indisposed to buy the whole sum at present.  You are afraid that the rate may surge in the coming months. With the agreement, you can buy the commodity at the existing rate.

As for the seller of the metal, fear of a fall in the rate will make the individual lock the present price by way of the futures agreement. The agreement assures that both parties can benefit from the transaction.

2. Where can you trade silver futures?

You can trade silver futures in the exchanges listed below:

• Commodities Exchange (COMEX)
• London Metal Exchange (LME)
• Multi-Commodity Exchange (MCX)

3. Why is an exchange needed?

The buyer and seller can meet and draw an agreement to trade the commodity without an exchange. Investors do not prefer this method as there is the risk of default. With an exchange the advantages are:

• A well-regulated transaction marketplace is present.
• The traded commodity is standardized.
• No counterparty risk is present.
• Arbitrage and speculation prospects are available
• Exchanges operate for a prolonged time, especially for commodity futures, ensuring more opportunities

4. Key trading tips

To trade silver, you should know some key terms that will help in an efficient process such as:

The maintenance margin denotes the sum you need to ensure the agreement is viable. When you don’t have enough funds, a margin call occurs. You have to use more capital to cover the margin. If you don’t provide the needed funds, the agreement can end.

Convergence is the name used to show that the silver futures rate has reached the spot price with the transfer date nearing.

Contango is the term used when the futures price is more than the spot price. Pro traders use strategies like arbitrage to take advantage of the rate change.

Backwardation denotes the situation where the spot price exceeds the futures price. The change may be due to the demand for silver being higher at present when compared to the maturation period. You can sell short at such times to make a profit.

Benefits of trading silver

You can benefit in many ways when you trade silver futures. Here are a few important advantages:

• Compared to conventional investment methods, silver futures can be traded 24/5. You can capitalize on the opportunities present regardless of the direction of the market.
• You have better leverage with the method, ensuring you use your capital efficiently.
• You can short sell your silver if needed.
• Although the method does not offer full liquidity, sufficient liquidity is present.
• Including the commodity as part of your investment portfolio will help in diversification. It helps to hedge in the face of market pullbacks.

Risks you should be aware of

As with any other trading method, there are risks when you trade silver using a futures contract. The risks you face are:

• Silver futures trading is volatile in the event of market crashes.
• The futures price of silver may increase more than the spot price (contango), or the spot price may increase(backwardation) instead of the two prices converging.
• The rate of silver can change, which causes the loss of a considerable portion of your investment

Final word

In the past few years, the rate of silver has been fluctuating making it an asset with high risk. If the futures price is higher than the spot price (aka contango), or there is a surge in the spot price, investors are affected. Hence it is necessary to have enough funds allocated to the agreement. You can reap the perks from this form of trading only when you are aware of the advantages and risks.