The futures market offers the adaptable investor the option of using small quantity of their own funds to manage large quantity of products, including gold, currencies, and commodities.
A futures contract is a legally binding contract to deliver, if you are selling, or to take delivery, if you are buying, of a specific commodity, index, bond, or currency at a scheduled date or price.
A futures contract can include everything from a standard size amount of oil, or a currency. The amount and date of delivery of the contract are indicated, though in almost all cases delivery is not taken as contracts are bought and sold for speculative or hedging purposes.
Futures are consumed by both those who use the actual commodity and by investors. For example, in May an investor or trader buy some stock, but doesn’t know what stock value will be selling for in December. He can sell a futures contract for December and “lock in” the future selling price today.
On the other hand investors can buy a futures contract if they believe the price of a security is going to appreciate, or they can sell a futures contract if they believe the price of a security is going to decline.
Futures are often thought of in the same category as options. While they are both derivatives, in that they derive their value from some base security, there is one key difference.
While options give the right, but not the obligation to buy or sell the underlying security, a futures contract is a legally binding obligation to buy or sell that same commodity. Therefore, while options limit your loss to the price paid for that option, futures trading could lead to a loss of your entire investment and more to meet that obligation.
Another difference between the futures and the equities markets involves the use of word margin. Although the contract sizes for currencies are large, an investor does not have to buy or sell a full contract. Rather, a margin deposit on the contract is maintained, which is actually a “good faith” amount of money to ensure your obligations to the full amount of the futures contract. Minimum margin requirements vary by broker, but are typically only a fraction of the contract’s total value, and are not related to the actual price of the contract involved.
Futures trades must be made through futures brokers, who operate both full-service and discount Operations, and may be related to the stock brokerage that you already deal with. However, popular discount stockbrokers do not handle futures contracts.
This information is for Learning purposes only. We are indeed not financial mentors. It should not be considered legal or financial advice. You should consult with a financial advisor or other professional to find out what may be the finest for your individual needs and risk tolerance.
Please do your own research.