What is a futures contract?

What is a futures contract?

Futures contracts bind both buyers and sellers in a derivative manner, agreeing to trade assets at a predetermined current price on a specific future date, regardless of the current market price. Futures contracts are available for various traders, including investors and speculators, as well as companies looking for physical delivery or supply of goods. Futures allow investors and traders to profit through price speculation, hedging, and arbitrage. Their main purpose is to enable market participants to reduce the risk of future price fluctuations of assets.

Futures contracts differ from options contracts, which also involve a buyer and a seller. Options may lose value upon expiration, but in futures, when the contract expires, the buyer is obligated to purchase and receive the underlying asset, while the seller is obligated to provide and deliver the underlying asset.

Both the buyers of options and futures contracts can benefit from leveraged holders closing their positions before expiration. The futures market serves two main purposes: price speculation ensures investors profit, while hedging ensures traders minimize losses.

Futures contracts promote futures trading, and individual traders usually profit from them, or companies use them to lock in prices for the goods needed for production and manufacturing. Futures are traded in various assets, such as cryptocurrencies, stocks, commodities, indices, and currency pairs.

futures trading in cryptocurrencies

Characteristics of Futures Contracts

Futures contracts are tradable:

Futures contracts are standardized.

Futures contracts are standardized.

Futures contracts are derivatives whose prices are based on the price of the underlying asset.

A futures contract is an obligation where the buyer is obliged to receive the asset at the agreed time and price upon the expiration of the futures contract, and the seller is obliged to deliver the required asset.

Futures contracts have a time limit.

Futures contracts are mainly settled by regulatory authorities.

What is futures trading?

Futures trading is a method of speculating or hedging on the future value of various assets such as cryptocurrencies, bonds, stocks, foreign exchange, and other commodities. Futures prices of cryptocurrencies, bonds, stocks, foreign exchange, and other commodities are traded with leverage over a period of time. Compared to spot trading of stocks, cryptocurrencies, and other tradable commodities, futures trading can use higher leverage, allowing for high returns, but it is also very risky and may lead to liquidation.

Futures are usually traded by brokers.

Futures Broker

A broker is an individual or company that organizes and executes financial transactions on behalf of another party. Brokers execute trades such as buying and selling stocks on behalf of their clients. The types of assets that brokers can trade are diverse, including cryptocurrencies, foreign exchange, stocks, real estate, and other tradable commodities. Brokers typically charge a commission for executing orders.

The difference between brokers, stock brokers, and brokerage commissions

Broker

A broker, simply put, is a person who represents others in buying and selling goods or assets. Brokers can be individuals or companies, acting as trusted agents or intermediaries in business negotiations or transactions. Brokers are typically licensed professionals or organizations requiring expertise in specific fields (such as finance, insurance, and real estate). Brokerage commission is used to describe their rate of compensation. Brokerage commissions are determined by industry practices or laws and are usually calculated as a fixed percentage or sliding scale of the transaction amount (value).

stockbroker

A stockbroker, also known as a licensed representative, is an investment professional who executes market orders on behalf of clients. Stockbrokers are registered representatives who work for brokerage firms and handle trades for retail and institutional clients. Brokerage firms and brokerage dealers are also referred to as stockbrokers. Nowadays, most buy and sell orders are executed using online discount brokers. These processes are typically automated, resulting in lower fees.

Full-service brokers are primarily used by affluent individuals and organizations, providing not only trade execution but also advice and portfolio management services. Stock brokers act as intermediaries between the market and traders or investors. Brokers accept client orders and attempt to execute them at the lowest possible price. As a result, they charge a commission known as brokerage fees.

Brokerage commission

When you buy or sell assets/stocks or anything through a broker, the commission charged by the broker for the transaction is called the brokerage commission.

Futures terminology

Trading Cycle:

The trading or contract cycle refers to the duration for which a futures contract is traded on a brokerage exchange. All futures contracts have a specified expiration date. Before the expiration date, traders have several options to close their positions or roll them over. After the expiration date, brokers settle with traders, and traders close their trades. Settlement is the fulfillment of the legal delivery obligations of the original contract.

Number of hands:

Futures contracts are standardized contracts with specific parameters. The number of contracts, market lot size, or contract size is one such specification. The number of contracts is the minimum quantity of units or shares that can be traded in futures. In simple terms, the number of contracts refers to the minimum quantity of units or shares that must be bought or sold under the contract. The number of contracts varies depending on the type of derivative contract.

Due date:

The expiration date is the date on which the buyer and seller of a futures derivative contract must fulfill their contractual obligations. On or before this date, investors or traders in futures contracts will make decisions regarding their positions that are about to expire.

Daily Market Surveillance:

Mark-to-Market (MTM) is a method of assessing assets based on recent market prices. An important feature of futures contracts is that they must be settled for gains and losses every trading day. This means that the value of the contract is marked to its current market value.

Summary

Overall, futures trading is considered “risky” because traders can easily be liquidated, but futures trading can be profitable depending on the trading strategies used and the trader's experience. The success of futures traders depends on their trading strategies, experience, and most importantly, how they combine these elements. A good strategy and proper execution can help futures traders become profitable. Futures trading combines fundamental and technical analysis. **$AGLD **$DUSK **$XDC **