A futures contract lets traders buy or sell a specific asset at a predetermined price for a later date. Also known as derivatives, a futures contract provides investors with the right to sell or purchase an underlying instrument expecting to make a profit from the price increase or decrease. In other words, one obtains not only an asset but also the right to benefit from price movement in the future.
In this article, we will answer some of the most common questions. What are futures contracts? What is the difference between a forward and futures contract? Who traders them and why?
Futures contracts come as a financial tool that makes it possible for all market participants to assume or offset the risk of price increase or decrease over a specific period. When you buy or sell futures, you obtain the right to buy or sell an asset at a predefined price no matter what happens. This fact ensures specific revenue guarantees although some risk might still occur.
Beginners think that these instruments are the same. It is not true. The key differences to take into account are as follows:
As a rule, futures contract traders can be divided into two major categories. They include hedgers and speculators:
At this point, we need to highlight some of the main benefits of trading futures contracts that can make them a better alternative to bonds or stocks:
Last but not least, futures contracts are a part of the commodity market. It means increased liquidity and fast transactions that reduce the timeframe between the decision and order execution.
To have futures contracts explained, we need to consider them an alternative investment opportunity that can be processed at lower trading costs. Investors use it as a separate asset category that does not correlate with bonds, stocks, or other types of commodities. Trading futures contracts brings a set of advantages. However, at some point, they may carry even greater risks due to increased market volatility.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.