Last Updated on 31 March, 2021 by Samuelsson
In the past, only big institutions and trading firms have access to speculative futures that help to provide liquidity to the futures market. These firms used to have people in the trading pits who do the trading for them. Fortunately, with the advent of the internet and online futures brokers, retail traders can also participate in speculative futures trading, as it’s now possible to trade via online platforms that are available as desktop applications and mobile trading apps. Interestingly, with some futures brokers accepting PayPal payment method, retail traders can easily credit their trading accounts and buy futures with PayPal funds.
One huge advantage of funding your trading account via Paypal is that it is instant and inexpensive. If you’re looking to buy futures with PayPal today, this post can help you. Here, we will discuss the various futures broker that accept PayPal deposits and what you can do if your broker does not support PayPal. But first, let’s find out what futures trading is and how it works.
What is futures trading
Futures trading is the process of buying and selling futures contracts for whatever reason, which could be for hedging or speculation purposes. A futures contract is an agreement to buy or sell a given quantity of an asset, at an agreed-upon price, on a specified date in the future.
Initially, futures trading was only carried out by relevant stakeholders for the given asset, such as farmers, mining companies, manufacturers, and other corporations who are one way or another involved in the ecosystem of that asset. These stakeholders come to the futures market to hedge their business by securing a contract to either buy or sell the asset at the current price but implement the delivery on a future date.
For example, a wheat farmer who spends $10 to produce a bushel of corn may decide to enter a contract to sell the wheat at the current price (say $15 per bushel) — but to deliver them in three months — so as to lock in the $5 profit per bushel. In this case, the farmer is trading futures contracts to hedge his produce against a possible price decline in the future. Similarly, the flour producer who is on the opposite end of the wheat farmer’s trade believes that wheat will soon be scarce and more expensive, so he decides to enter the contract for the delivery of the commodity on a future date. If, in the next three months, wheat price rises to $17 per bushel, the flour producer has saved $2 per bushel. While the wheat farmer may have missed an opportunity to make an extra $2 per bushel, he would take comfort in having secured a profit of $5 per bushel and avoiding the possibility of a loss.
However, futures trading isn’t just about commodities. There are futures contracts for equities, equity indices, the volatility index, and even Bitcoin. These contracts are standardized and trade on futures exchanges, with the exchange acting as a middle man between the buyer and the seller and supervises the settlement of the contract on the delivery date.
While the market was designed for stakeholders to hedge their risks, there are different kinds of financial players in the market, including investors and speculators as well as companies that want to take physical delivery of the commodity or supply it. So, beyond hedging, the market is driven by speculative trading. Speculative trading allows people who have no interest in taking deliveries of the underlying asset to trade the futures contracts to benefit from price changes.
How futures trading works
As we stated earlier, futures are standardized contracts — that are traded on an exchange — which represent an agreement for the exchange of a specified quantity of a given asset at the current price but on a future date. So, a wheat farmer who wants to hedge his produce can sell a wheat contract equivalent to the expected harvest before the harvest. He can plan it in such a way that the expiry date of the contract comes after harvest, but if that is not possible, he can keep rolling over the contract until the harvest so that he can deliver the asset on contract expiration as scheduled. The flour company on the other end of the trade waits until contract expiry to take delivery of the wheat. The exchange’s clearinghouse acts as the middleman and oversees the delivery of the asset.
However, for the majority of futures traders who trade the contracts for speculative purposes only, physical delivery of the asset is not needed. Speculators trade to profit from price movements. So, when a speculator buys a futures contract because of an opportunity he has seen in the market (a potential price movement in a particular direction), he holds it until the opportunity has played out. He then offsets the position before contract expiry. If this trader thinks the asset still has room for further price movement but the contract is nearing expiration, he can roll over the contract to the next one by simultaneously offsetting the current position and opening a new one in the next contract month. Eventually, when the opportunity has played out and the market has reached the profit target, the trader offsets the position. However, backwardation and contango can eat into the profit when rolling over.
Furthermore, not all futures contracts are physically settled. Many futures contracts, such as equity index futures, single stock futures, and volatility index futures, are cash-settled. For such contracts, even when held till expiration, the trader only gets the profit or loss from the trade credited to, or debited from, his account when the trade is closed on the expiration day.
How to buy futures with PayPal
Now that you have understood what futures trading entails, let’s take a look at how you can buy futures with PayPal. There are many ways you can play the commodity and equity futures market with the funds in your PayPal wallet. They are as follows:
1. Trade with brokers that accept Paypal
The easiest way to buy futures with your PayPal is to open a trading account with a futures broker that accepts PayPal as a method of funds deposit and start trading with them. Many futures brokers don’t accept fund deposits from PayPal, so you may need to do a bit of searching to find one. Here are some of the online brokers that offer futures trading and accept PayPal payment method:
- E*TRADE: It is a US-based online multi-asset broker that offers access to several futures contracts. The broker accepts deposits from PayPal.
- Charles Schwab: This is another US-based multi-asset online broker that offers futures trading along with other financial markets like equities, ETFs, and mutual funds. The broker accepts PayPal deposits.
- eToro: This is a popular copy-trading platform that is based in Europe. They offer forex brokerage services, including direct access to the equity and futures markets. Interestingly, they accept PayPal deposits for futures trading.
When you get the right broker that suits your needs, open a futures trading account with the broker. You will have to provide your information plus proof of identity and proof of address. The broker may also ask you to answer a questionnaire to ascertain your level of experience. If you don’t already have a PayPal account, you should open one and ensure there are some funds in it.
At this point, you head to the deposit page of the broker and choose the PayPal option for funds deposit. There will be a pop-up box where you enter your PayPal login. Paypal will ask you the funding source you want to use — your linked bank account or credit/debit card. Choosing the latter will guarantee an instant deposit to your brokerage account. Once the deposit is processed by Paypal, the pop-up box will close, and you will be taken back to the broker’s website where you will see that your brokerage account has been credited. You can then use the funds to buy the futures contracts you want. For most of these brokers, you can also withdraw your funds via PayPal.
2. Make use of TransferWise
If you don’t like any of the brokers that accept direct deposits from PayPal or probably prefer a particular broker that happens not to accept direct PayPal deposits, you can make use of this option. There are many big brokerage brands (with a presence in multiple countries) that don’t accept direct deposits from PayPal — examples include Interactive Brokers, TradeStation, TD Ameritrade, and others.
For these brokers, you can make use of TransferWise in funding your trading account while you use PayPal to fund your TransferWise account. TransferWise is an innovative international money transfer provider that offers a multicurrency account. You can use it to deposit money with a broker and also receive payment.
Here is how you can use TransferWise to deposit your PayPal funds into your trading account with an online broker:
- Have a funded PayPal account: You already have a PayPal wallet with funds in it and probably looking for how to transfer the funds to your trading account with a particular futures broker.
- Open a TransferWise account: Create an Account with TransferWise and copy your account number for the currency of interest.
- Link your TransferWise bank accounts with your PayPal wallet: Sign in to your PayPal account and go to the wallet section where you link bank accounts and debit/credit cards. Link and confirm the account number you got from TransferWise to your PayPal account.
- Transfer from PayPal to TransferWise: Send the fund you want to trade with to your TransferWise account. Remember to factor in the cost of the transfer, so you may need to transfer a bit more than you need to trade with.
- Deposit into your broker’s futures trading account via TransferWise: From your TransferWise account, transfer the fund to your trading account with your futures broker.
- Start buying futures with the funds in your trading account: Now that you have funded your trading account, you can start to buy the futures contracts you want.
3. Trade CFDs of futures products
The third option is to CFDs (contracts for difference) that track the specific futures contracts you desire to trade. A CFD is a contract with a broker to exchange the difference in the price of an asset from when the contract is opened to it is closed, and in this case, the price in question is the price of the futures contract (not spot price) of that asset. Many CFDs track the spot price, but some, especially CFDs for commodities and indices, do track the futures prices.
This option is available with most online forex brokers, such as IG, Pepperstone, XTB, AvaTrade, FBS, FXTM, etc. It is the easiest of the three options because many of those brokers accept the PayPal payment method. However, CFDs are directly controlled by the broker, so there is a huge possibility of a conflict of interest and outright cheating.
If you are interested in this option, open a trading account with any of those brokers. Deposit your trading capital from your PayPal funds, and start trading your preferred CFDs. Commodity and indices CFDs are likely to track the futures prices and offer you exposure to the futures market.
The pros and cons of buying futures with PayPal
But why buy futures with PayPal funds? Well, using PayPal to fund your futures trading account offers the following benefits:
- It is easy to get started with a broker that supports PayPal payment because Paypal deposits are usually instant.
- Brokers don’t usually charge you when you deposit funds with Paypal.
- Withdrawals are usually faster than with traditional payment methods.
- PayPal also offers a security advantage, as you are not required to enter sensitive debit/credit card details into the broker’s website.
Despite the benefits, there are some cons to buying futures with PayPal. Here are some of them:
- Presently, there are very few futures brokers that accept deposits from PayPal.
- Even when you find a PayPal-supporting futures broker, the deposit limit is usually lower for PayPal compared to debit/credit cards or bank wires.
- Your Paypal account must be verified before you can deposit funds with the broker.
While you can buy futures with your PayPal funds, it is often difficult to find futures brokers that support PayPal payments. You may have to make use of TransferWise or trade CFDs that track some futures markets.