Futures

Futures or a futures contract represents a legal agreement to buy or sell a security or asset at a predetermined price at a specified time in the future.

Of note, the parties are not known to each other.

These transactions usually involve commodities or other securities involving the buying and selling for a forward or predetermined price.

Futures also adhere to a delivery date, which specifies the date of delivery and payment.

Relative to other forms of investing futures are much more complex, as they involve specified and non-flexible parameters.

Futures Trading Explained

Futures contracts are negotiated at exchanges that act as a unified marketplace for both buyers and sellers.

Buyers of contracts represent long position holders, while selling parties constitute short position holders.

Both parties risk their counterparty walking away if the price goes against them.

As such, the contract can involve both parties incurring a margin of the value of the contract with a mutually trusted third party.

This margin can range substantially, depending on the current volatility of the market of the security being traded.

Futures can be incredibly risky and are the textbook definition of market speculation.

A trader who predicts that the price of an asset will move in a certain direction can contract to buy or sell it in the future at a price.

If this prediction is correct, the trader will profit. If the prediction is incorrect there will be losses. Futures trading is considered an advanced type of trading that requires prior knowledge and understanding.

For this reason, retail traders will seldom be afforded access to futures trading by brokers without first undergoing specific questions or account requirements.