Summary:
Just like every other kind of investment, this also has its pros and cons. The pros mainly are the fact that investors can use the futures contracts to determine the direction the price of a commodity will take, and using this, companies will hedge the price of their raw materials to protect against adverse price movements.
Just like every other kind of investment, this also has its pros and cons. The pros mainly are the fact that investors can use the futures contracts to determine the direction the price of a commodity will take, and using this, companies will hedge the price of their raw materials to protect against adverse price movements. The cons include the fact that it involves a high level of risk, more than the initial margin amount since futures are all about leverage.
You can't deny the gate of opportunities to make money and invest in better trading has brought into the stock market. To be one of the best futures brokers, you need to first understand the basics of futures trading.
Let's drive into some essential terms you need to understand and know before we explain further. Understanding futures, in general, will help you understand and choose better the best commodity trading software.
What Do We Mean By Futures?
Futures are derivatives of financial contracts that bind two parties together to buy and sell an asset at a speculated future date and price.
The buyer must buy at the price stated; the same goes for the seller. This is regardless of the current price at the expiry date of the contract. Both parties are to adhere to the contract between them. These underlying assets may include physical commodities and financial instruments. The details of the futures contracts entail the quantity of the underlying assets which are standardized to facilitate trading on all future exchanges.
Also, note that futures can be used for hedging or trade speculation.
What You Need To Understand About Futures
Futures are also called future contracts. They allow traders to lock prices of an underlying asset or commodity. When these contracts are made, they usually have expiration days, and even the prices are usually set in advance. These future contracts are identified by their expiration dates or months.
When traders and investors involve themselves in futures trading, they use different terms to reference the overall asset class. There are, however, many types of futures contracts available for trading, some of which include:
● Commodity futures are with an underlying commodities such as crude oil, natural gas, corn, and wheat.
● Stock index fixtures also have underlying assets such as the S&P 500 index.
● The currency futures include those who would like to trade in the euro and British pounds.
● There is also precious metal which includes gold and silver.
● And lastly, U.S. Treasury figures for bonds and some other financial securities.
It would be best if you always kept in mind that there is quite a distinction between options and futures.
The American-style options contracts would give you, the holder, the right to buy or sell the assets any like before the expiration date elapses, but it will never give you the obligation to.
With the European options, however, you get to exercise the expiration date rule not you do not have the right to.
On the other hand, the buyers of a futures contract are obligated to take possession of the underlying commodity or its equivalent at the point of expiration and not before.
They can also sell their position at any point in time before the expiration to be free of their obligation. This way, both the buyers and sellers benefit from both the options and while the futures contracts benefit from the leverage holder's position before the expiration date closes.
