Understanding Futures

What Are Futures?
Futures are financial derivative contracts that bind parties to buy or sell an asset at a specified future time and price. Regardless of the market price at the date of expiration, the buyer or seller must buy or sell the underlying asset at the agreed-upon price.

Physical commodities and financial instruments are examples of underlying assets. Futures contracts are standardized to make trading on a futures market easier and specify the quantity of the underlying asset. Futures can be utilized for trading speculation or hedging.

Understanding Futures
The price of the underlying asset or commodity can be fixed through the use of futures, often known as futures contracts. These contracts have set pricing that are known up front as well as expiration dates. Futures are distinguished by their month of expiration. For instance, a gold futures contract for December expires in December.



Pros
Futures contracts allow investors to make predictions about the movement of an underlying asset's price.

To guard against unfavorable price changes, businesses can hedge the price of the items they sell or the raw resources they use.

Futures contracts may only need a tiny portion of the total contract value to be deposited with the broker.

Cons
Futures use leverage, so investors run the risk of losing more than their initial margin.

A corporation that hedged its exposure can lose out on positive price fluctuations if it invests in a futures contract.

Gains can be amplified but losses can also be, making margin a double-edged sword.