The Basics of Trading Futures

As the name implies, Futures are contracts that stipulate that a specified amount of an underlying asset will cost a specific price on the expiry date of the contract. The underlying asset can be anything from a commodity like oil or gold to a financial instrument like stocks or bonds.

Traders use Futures to hedge risk from unfavorable prices or exchange rates. They can also be traded for pure speculation. A futures contract for a stock index, for example, gives the trader leverage to take on big positions that would require much more capital on the spot market.

Many people who trade Futures do so to hedge their exposure to a particular asset or index. For example, an oil company that needs to sell its oil will use Futures contracts to lock in a price that it will receive for the commodity and be obligated to deliver when the contract expires. Companies that trade in this way are known as hedgers, and their purpose is to manage their exposure to risk rather than seek profits from speculating on future price movements.

Futures contracts can be settled with either physical delivery or cash settlement. Generally, the trader will pay or receive a cash sum to reflect the difference in the value of the underlying asset at the time the contract is due to expire. Depending on the underlying asset, futures contracts can be long or short. A long position is bought if the trader believes the underlying asset will rise and a short position sold if they believe it will fall.W

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