Futures trading is an investing strategy that involves agreeing to buy or sell an asset, like a commodity or stock, at a predetermined price in the future. Futures contracts are standardized so that each contract represents a specific quantity of the underlying asset.
Futures can be used to hedge risk or speculate on the future price movement of an asset. For example, if you are concerned about the future price movement of a stock, you could buy a futures contract that would allow you to sell the stock at a fixed price in the future. This would protect you from any downside price movement. Alternatively, if you thought the stock was going to go up in price, you could buy a futures contract that would give you the right to buy the stock at a fixed price in the future.
How Futures Contracts Work
Futures contracts are traded on exchanges and can be for any length of time. The most popular futures contracts are for commodities like corn, crude oil, or gold, but they can also be for stocks, indexes, currencies, or other assets.
When you trade a futures contract, you are not actually buying or selling the underlying asset; rather, you are entering into an agreement with someone else to buy or sell the asset at a later date. In most cases, both parties will agree to buy or sell the underlying asset at its current market price when the contract expires.
Futures contracts have many of the same features as other types of contracts, including an expiration date, a strike price (or exercise price), and a delivery date. The main difference is that Futures contracts are traded on exchanges and are standardized so that each contract represents a specific quantity of the underlying asset. For example, one crude oil futures contract is for 1,000 barrels of crude oil.
There are two types of participants in the futures market: hedgers and speculators. Hedgers use futures contracts to offset their exposure toprice fluctuations in the underlying asset. Speculators try to profit from changes in prices by correctly predicting which way prices will move.
Participants in the futures market can trade directly with each other or they can trade through intermediaries called brokers. When trading through brokers, traders must post margin—a good faith deposit—with their broker as collateral for their trades…
Understanding these basics is essential before considering futures trading as an investment strategy. However, there is still more to learn before diving into this complex market. If you’re interested in learning more about futures trading, consider signing up for our free email course below. You’ll receive 7 lessons over 14 days that will cover everything from what moves prices in the futures market to how to choose a broker and place trades.”;