Beginners Guide To Futures Contracts
What is Futures trading?
Futures trading is a type of trading arrangement wherein traders agree to buy or sell assets in the future at a set price and standardized quantity and quality. Under this arrangement, the agreeing parties have to sign futures contracts to make the trade legally binding to avoid any problems when the delivery date arrives.
What assets are typically sold under this agreement? In futures trading, a good number of assets are sold, and it is not limited to actual commodities only. However, the most common type of assets sold under this kind of agreement are agricultural commodities such as livestock, fruits, wheat, and vegetables, stock indexes, bonds, metals, interest rates, oil, and other assets can also be traded.
What are the risks involved in futures trading?
Trading futures involves a lot of risks, as it does not always guarantee profit. However, it is ideal when it comes to situations where market prices are constantly fluctuating, as it offers some level of security. Farmers who sell their crops before they harvest and agree on a fixed price even before the market price at the time of harvest is determined can profit more than other farmers if he sells the price for much higher than the current market price during the delivery date. This is why it is important to have a futures contract, as it finalizes the deal so that none of the parties would back out in the event of an undesirable outcome.
Who is involved in this type of trading?
In any futures trading arrangement, there will always be hedgers and speculators. The former buys or sells particular assets, with market price risks in mind whereas the latter predicts movements in the market to determine whether market prices of certain commodities will go up or down. The speculator plays an important role in any futures trading agreement, as he will determine the actions that the trader should take.
Futures trading contracts are typically regulated by the government, though there are also some independent agencies that regulate such agreements, depending on the country. Those who break any rules in the contract will be held liable and will be required to pay fines for breaking any clauses. This is why it is important to carefully decide on the terms of the agreement before agreeing to it, as you cannot change any part of it once the contract has been signed and if you don't decide properly, you may incur a lot of losses when delivery time comes.