Futures trading is a financial tool which allows market participants to buy contracts that represent a certain amount of a particular asset to be delivered at a future date. It is a type of derivatives trading, as the futures contract is derived from the underlying asset.
The value of futures trading is that it allows participants to take advantage of market opportunities at favorable prices in the future. It is common for futures contracts to be bought and sold for speculative purposes, as the holding period for a futures contract is usually short.
In some cases, it is possible to buy futures contracts for physical delivery of a particular asset at a predetermined price at the end of the contract period. This is known as delivery of the asset rather than a settlement of the contract.
In general, futures are used as a way to speculate on the future price movements of a given asset. For example, a trader may buy a futures contract in currency futures to speculate on whether the US Dollar will appreciate or depreciate against the Euro in the future.
Traders may also use futures contracts to hedge their portfolio. For instance, a trader may buy a futures contract in crude oil to protect against any fluctuations in the price of oil, which could affect the value of their investments. Futures trading is also used to gain exposure to certain markets or commodities. For example, traders may buy futures contracts in a particular commodity to gain exposure to that market and take advantage of any price movements for that particular asset.
In order to participate in futures trading, traders need to be familiar with the process and the market rules which apply to them. It is important to understand the risks associated with each contract before entering into a trade.
Futures trading can be volatile and carry a higher degree of risk than other types of trading. Markets can be affected by a number of factors, such as changes in political, economic and environmental conditions, as well as supply and demand. For this reason, it is important to have a good understanding of the market fundamentals before entering into a futures position.
Traders should also be aware of the margin requirements which apply to futures trading, which can vary between brokers. Most futures exchanges require investors to maintain initial margins with their brokers to cover potential losses in the event of an adverse market move or price change.
Futures trading can be a lucrative activity, as traders can take advantage of leverage and the potential to profit from price movements which may be favourable to their strategy. However, it is important to remember that futures trading carries greater risk than other types of trading and caution should be exercised when taking any positions.
