What is a futures contract?

A futures contract is a transaction in which you and an investor agree to buy and sell a commodity at an agreed price in the future (as the name implies). "A commodity" can be any item, such as stocks, commodity, currency, and may be delivered in a few months (if to be delivered), the key is that the price is in accordance with the current agreement.

Where have you heard about futures contracts?

You may have encountered futures contracts for commodities such as crude oil, wheat or metals in news reports, because the prices agreed in futures contracts are considered important indicators of long-term trends. If the futures price of crude oil increases rapidly, it indicates that energy costs will also rise.

What you need to know about futures contracts...

Most of us have unknowingly signed a "futures contract", and the purchase agreement (the house price follows the current agreement and is finally paid on a fixed date in the future) follows the same principle.

But a major difference is that futures market contracts can be traded back and forth between market traders.

This in turn makes the second major difference, although all futures contracts will eventually demand the holder must buy and sell at the agreed price and complete the transaction, but most contracts do not last until the agreed date. Why? Because when either party to the contract may profit from the transaction, the contract will be canceled before the delivery date.

How to do this? Go to the market and buy the "opposite product" of the contract, I .e. an agreement to buy or sell the corresponding asset. The effect is to terminate the original contract and make a profit.

This is in sharp contrast to forward contracts, which typically last until delivery.

Futures contracts are settled on a daily basis at the end of each trading session to provide a daily assessment of their positions relative to the market value. Since the financial crisis, more and more futures trading needs to be cleared on exchanges rather than over-the-counter to provide greater transparency.