Futures contracts are derivative contracts that allow traders to buy or sell assets at a specified date in the future, at a price agreed upon at the time or beginning of the trade. While seemingly novel, this type of trading has actually occurred for longer than most people realise — the PDF attachment looks at the history of trading futures.
A broad range of assets can be traded on futures contracts, including tangible goods (such as crops and precious metals), cryptocurrencies, exchange-traded funds, individual stocks, and more. Both day traders and novice traders can experiment with futures contracts, provided they are prepared to do their research.
Retail forex trading broker LegacyFX provides introductory courses on a range of investment and trading vehicles, including futures contracts. There are various types of futures contracts, each with their own pros and cons.
Types of Futures Contracts
All futures contracts operate on the same premise: as a legally binding agreement between two parties for the purchase and sale of a specified volume of an asset at a set price on a certain day sometime in the future. However, they can be applied to almost any asset and used across most major markets.
The embedded infographic looks at some of the different types of trading markets available.
The most common types of futures contracts regularly traded include interest rate futures, currency futures, stocks and bonds futures, and commodities futures.
Futures Contracts for Hedging
In many cases, futures contracts are exchanged between two parties who each hedge to reduce their risk exposure in some way. An example would be a fuel distributor wanting to ensure they had a steady market and protect against sudden price declines trading a futures contract with an airline company wishing to protect against future price increases for fuel. The two would arrange a futures contract specifying the terms of sale on a set date, at an agreed-upon price.
Futures Contracts for Speculating
Not all traders in futures contracts have a vested interest in the underlying asset. Many traders speculate on the futures market, essentially betting on the direction they think a price will go. These speculators make (or lose) money depending on the value of the contract at a future date. These types of futures traders have no intention of ever purchasing or selling an asset, as they are simply hoping the contract itself will become more valuable over time.
The short video attachment explains the difference between futures contracts and CFDs.
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