Futures are normally traded in contracts and are a legally binding agreement between a buyer and a seller. The seller must deliver the specific agreed upon asset at a future date but for the price agreed today.
Futures markets allow companies and individuals to protect themselves against fluctuations in the price of an asset that they are interested in. This allows them to sell an asset in advance giving them the ability to make plans for the future in the knowledge that they have a fixed price.
For new traders the word future can be confusing as the word implies that everything takes place in the future. What actually happens is that the settlement takes place in the future but the price is agreed upon on that day (today).
It also important to realize when trading futures that just because you bought it does not mean that you have to keep it until settlement. You can sell the contract long before delivery of the contract is due.
Like many other markets you also do not need to necessarily own the asset before you sell it. You can sell a futures contract just as easily as you can buy it.
Because futures have been around for such a long time nearly all markets around the world that trade in futures are highly regulated. The fundamental principle of a future is fairly simple.
You buy or sell something at today's price for delivery in a future date. This can prove to be extremely valuable to farmers and organizations to protect themselves against future fluctuations in price.
There are three main reasons for trading futures and they are:
Speculation - Many traders trade the futures market solely for the purpose of speculation. They have no intention of taking delivery of any asset but merely wish to speculate on the direction of the market.
Arbitrage - Is simply trying to make a profit by exploiting the difference in two different markets. If for example you though that the DJIA futures market was trading to high you might attempt to sell the futures and simultaneously buy the cash market.
Hedging - Hedging is common in both the commodities and financial assets. If you owned a portfolio of stocks and you thought that the market was about to correct but you still wanted to keep the stock, you might try to sell the market index of where the stocks where listed.
Author Resource:-
Martin Chandra is a full-time investor. Get limited offers at here.
![[Valid RSS feed]](http://www.niche-content-articles.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites
