Futures Finance Investopedia

Futures contracts are standardized agreements to buy or sell a specific asset at a predetermined price on a future date. They're a core component of the derivatives market and are used for hedging and speculation.

Hedging: Hedging involves using futures contracts to mitigate risk. For example, a farmer might sell corn futures to lock in a price for their crop before harvest, protecting them from potential price declines. Conversely, a food processor might buy corn futures to secure a future supply at a known price, shielding them from price increases.

Speculation: Speculators aim to profit from price movements. They buy futures contracts if they believe the price will rise (going long) and sell if they believe the price will fall (going short). Speculation adds liquidity to the market but also carries significant risk.

Key Features:

• Standardization: Futures contracts are highly standardized, specifying the asset, quantity, quality, delivery location, and delivery date.
• Leverage: Futures trading involves leverage, meaning a relatively small amount of capital (margin) can control a large asset value. This amplifies both potential gains and losses.
• Mark-to-Market: Futures accounts are marked-to-market daily, meaning profits and losses are credited or debited daily. If the account balance falls below the maintenance margin, a margin call is issued, requiring the trader to deposit more funds.
• Exchange-Traded: Most futures contracts are traded on regulated exchanges, ensuring transparency and clearinghouse guarantees.

Common Assets: Futures contracts exist for a wide range of assets, including:

• Agricultural Commodities: Corn, soybeans, wheat, cattle, hogs.
• Energy: Crude oil, natural gas, heating oil.
• Metals: Gold, silver, copper.
• Financial Instruments: Treasury bonds, Eurodollars, stock indices.
• Currencies: Euro, Japanese yen, British pound.

Risks: Futures trading involves significant risks, primarily due to leverage. Small price fluctuations can result in substantial gains or losses. It's crucial to have a thorough understanding of the market and risk management strategies before engaging in futures trading. Margin calls, market volatility, and unexpected events can all lead to significant financial losses.

Getting Started: To trade futures, you'll need to open an account with a futures broker and deposit margin. Thorough research, a well-defined trading plan, and disciplined risk management are essential for success.