How Do Futures Contracts Work?

Future contracts are one of the prosperous investment options in the recent times. A type of derivatives, this is an agreement to purchase or sell a specified asset for an agreed price at a future date. Future contracts are honored on a future period, and the underlying asset could be any financial instrument, a currency, commodity, etc. In case you are interested in gaining knowledge about future contracts, consider reading the article below to understand how these futures contracts can be used efficiently as speculative and hedging tools.

More details about Future Contracts

The contract holder is required to deliver or receive the asset as the agreement state or bound them. The contract can be fulfilled, for instance, fulfilled either in a physical settlement or case. Futures are exchange-traded and are consistent. A contract must specify the asset delivery month, the underlying asset, and the currency of the agreement.

How Do Futures Contracts Work?

Comparatively less initial costs, the presence of an organized stock market, standardized contracts, greater liquidity are contributing to the growing popularity of futures. However, one must be fully aware of futures pricing, strategies to reap maximum benefits. The core of futures contracts lies in predicting whether the price of the asset will rise or fall in the future. Depending on various inputs from market analysis one can predict the movement of price and enter into either buy or sell contracts at a price fixed today.

Futures are broadly classified based on their settlement. Contracts traded for physical delivery like agricultural products, crude oil, or any other commodity are commodity futures while contracts which are settled for cash for example treasury notes, bonds, etc. are financial futures.

Trading in Futures Involves 3 Necessary Steps:

Entering into a Contract

A future deal consists of a lot of the underlying assets. For example, A futures contract for shares of a particular company includes a hundred or two-hundred and fifty or five hundred shares. The lot size varies based on the underlying asset.

Payment of Margin

A future contract buyer only pays the margin amount but not the entire value of the deal. This margin is usually a percentage on the contract amount and is set by the exchange.

Trading

Based on the cost ranges of the underlying commodity, your margin amount is either debited or credited. Such amendments to your margin amount are carried out till either sale of the deal or expiry of the contract.

Futures contracts are both risky and profitable. One is encouraged to have a thorough knowledge of a market’s derivative and futures before entering into future contracts trading.

Futures markets represent a broad and diverse cross-section of the global financial system. This energetic and diversification nature of future markets speculation make these investments attractive to many investors, regardless of whether they wish to diversify their assets or, are looking for a higher return or risk venture.

Just like any other type of investment, commodity trading also has its benefits and drawbacks. It would be good for an investor to first gain knowledge of the future contracts trading before undertaking in the opportunities that it may provide.

Patrick Clives is author of the article How Do Futures Contracts Work? Patrick is from Miami, he is a professional finance blogger and contributor at neural network stocks.

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