FUTURES: UNDERSTANDING THE BASICS

A futures contract is quite literally how it sounds. It’s a financial instrument — also known as a derivative — that is a contract between two parties that agree to transact a security or commodity at a fixed price at a set date in the future. It is a contract for a future transaction, which we know simply as “futures.” The vast majority of futures do not actually result in the delivery of the underlying security or commodity. Most futures transactions are purely speculative, so it’s an opportunity to profit or hedge risks, and not usually used to take delivery of the physical good or security for most traders. If Person A is selling wheat for five dollars a bushel, and the baker or buyer agrees to that price, the contract is struck. Futures, while liquid, ensure that suppliers don’t over-produce and that supply can be met within a given time and profit margin. There are many types of futures contract to trade. They include: › › Interest Rates Grains › › Metals Energy › › Currency Livestock

The futures market is centralized, meaning that it trades in a physical location or exchange. There are several exchanges such as The Chicago Board of Trade and the Mercantile Exchange. Traders on futures exchange floors trade in “pits,” which are enclosed places designated for each futures contract. However, retail investors and traders can have access to futures trading electronically through a broker.