By reading the article “What is Futures Contract” in the financial markets which is published in Adaas Investment Magazine, you will get acquainted with Futures Trades and its usages in general. This level of familiarity can be enough for you to invest in the financial markets.
Before studying the definition of a futures contract, one should be aware of the nature of trading derivatives in financial markets.
In financial markets, derivatives are assets that are valued by another asset. For example, securities derivatives traded in international financial markets are valued by the valuation of the stock-backed company and simply put, the value of each stock is a function of the value of the backing company.
Now that you are familiar with the concept of derivatives, you will better understand the nature of futures contracts. A futures contract is a derivative trading instrument in the financial markets that sets the buyer and seller of a trade for the future.
In a futures contract, the seller sells a tradable instrument to the buyer in the future so that the price, date, and other components of the transaction are compiled and recorded at present.
For example, the seller sets a contract for the sale of a bitcoin cryptocurrency at twice the daily price for the next 3 months for the buyer. This process is called futures trading in the financial markets.
Innovation of futures contracts was established in 1972 in the agricultural and fossil fuel industries. With this contract, farmers could sell their produce at present and receive the income from it if they deliver the product to the buyer a few months later according to the contract.
Simply put, a futures contract is a good strategy for buyers or sellers who want to pre-purchase or pre-sell an asset at the current price. This strategy reduces the risk of price fluctuations for people.
One of the most important applications in futures contracts is the Speculation in different financial markets. As you have seen many times on most trading platforms, futures are traded in the Futures section.
In the futures market, there is a downside market for traders, also known as the two-way market. To better understand the issue, you should read the difference between spot and futures markets in a concise and useful way!
In short, in the Spot market the buyer receive assets after the payment is completed. But in the futures trading market, traders make payments while the goods are not received instantly.
In the futures trading market, trades take the form of long buy and short sell positions. This feature allows speculators to make a profit in the downtrend markets through the short-selling position. This feature is not available in Spot markets, and traders can only make a profit by buying at a lower price and selling at a higher price, which in financial market terms is a one-way market.
Futures contracts in the financial markets are divided into two categories, which are described below.
These contracts include assets which are traded in a variety of financial markets. Assets such as stock shares in the stock market, currency pairs in the forex market, cryptocurrencies such as bitcoin, and so on.
A variety of physical goods such as raw materials such as iron and textiles or agricultural products are included in this category of futures contracts. In these contracts, due to physical delivery, the goods must comply with the quality and quantity standards of the parties to the contract, and also the important components of the time and place of delivery in the future contract of goods must be specified.
As you have read so far, the futures derivatives trading instrument sets a clear settlement time for both the buyer and seller. But there is another type of futures contract that introduces a futures contract with no expiration date.
Another difference between these contracts and futures contracts with expiration date is the possibility of using trading leverages up to 100 times the traders’ deposits. A very important point for traders is how to calculate and work with trading leverage tools. Forex trading market leaders introduce this feature as a double-edged sword to help traders make more profit or go bankrupt.
We are sure that after studying this tutorial from the beginning until now, you have created a clear picture in your mind of futures contract trades and their nature. In the following, while introducing the benefits of the futures contract, you will read a review of the previous contents.
Traders who wish to operate in the futures trading market must guarantee the number of their financial deposits according to the terms of the contracts.
In the Spot market, traders own goods. It means that capital is lost if the asset price becomes 0. But in the futures contract market, price changes depending on the leverage, the amount of the trade commission, and so on make a trading position profitable or unprofitable.
Futures trades increase the trader’s deposit if the price moves in the direction of the trading position, and this in the opposite direction reduces the deposit capital and makes a loss. If the deposit is less than the minimum amount of the guarantee number, which is a function of the terms of the futures contract and exchange commissions, to continue the contract, the trader or investor does not matter whether they are a buyer or a seller, must increase the guarantee deposit above the minimum and if the amount is not increased, the trading position will be liquidated.
At Adaas Capital, we hope that by reading this article you will be fully immersed in the futures contract in financial markets. You can help us improve by sharing this article which is published in Adaas Investment Magazine and help optimize this article by submitting your comments.