Futures are best described as derivative financial contracts that ensure the stakeholders carry out a transaction using an asset or item of value using a preconceived future date and price, hence the name futures. In such transactions, the buyer has no other choice but to buy the asset or the seller will have to face the obligation of selling the said asset at a fixed price. This is irrespective of the price in the market by the date agreed upon.
Assets that can be used in this kind of transaction include physical items and various kinds of financial instruments. Futures contracts contain information about the asset in question and are prepared in line with all the principles guiding the operation of a futures exchange. Futures are also very useful for trade speculators and those into hedge funds.
Things to Know About Futures
Also called futures contracts, futures make it possible for traders to fix the price of a commodity or an asset. This way, it becomes possible to put expiry dates and fix prices that are already made clear to everyone ahead of time. The identification of futures is done by using the details of the expiration. For instance, a March platinum futures contract is going to reach its expiration in March. Even though futures often refer to the general market, there are several kinds of futures contracts that traders can be involved in. These include the following:
- Stock index futures like the S&P 500 Index
- Precious metal futures for gold, platinum, and silver
- United States Treasury futures for bonds
- Commodity futures like petroleum products, natural gas or grains like rice, soybeans, wheat, and maize
- Currency futures like the pound sterling or the euro
At this stage, it is very crucial to point out that there is a difference between futures and options. With options deals, the holder has the ability to purchase or sell the underlying asset once it expires. But the holders of a futures contract have no other choice but to strictly adhere to what was outlined in the contract.
Advantages and Challenges of Futures Contracts
- It is possible for investors to utilize for speculation by using trends of the price fixed to the underlying asset.
- Ventures and corporations can engage in the hedging of the rate of the items they sell. This is often to get protection from wild price swings.
- All that may be needed for futures contracts maybe just a deposit of a portion of the contract sum with the broker.
Just as with other business transactions, there are also some other challenges with futures trading too. The following are some of the hiccups that come up with futures trading.
- Investors face the possibility of losing more than the starting margin and this is due to the influence of leverage.
- When a venture invests in a futures contract, it can mean losing the opportunity to get involved in transactions whenever the prices become favorable.
- Losses can be particular massive depending on the margins used.
Regulation of Futures Trading
Each country has its own regulatory agency or authority in charge of controlling all that has to do with futures trading. In the United States of America, this responsibility is carried out by the Commodity Futures Trading Commission, better known as the CFTC.
It was established as a federal agency in 1974 and it is saddled with controlling futures market pricing, ensuring unethical trading practices are not allowed and also controlling brokerage ventures that are taking part in futures trading. It is very important that anyone interested in taking part in futures trading deals does so with only a licensed agency.
Future Trading is a major market and is considered amongst the best for beginners given no requirement of big funds to begin or anytime restricted due to being 24/5 open.