The futures contract is a mutual contractual agreement between the two involved parties regarding purchase, sell and delivery of a financial instrument or commodity in the future at a delivery date but at the prices determined today as per the current market conditions. It is a derivative product as it is product of any underlying assets like commodities, stocks, currencies, bonds or interest rates. The title ‘long’ is used to refer the buyer and ‘short’ is used to refer the seller of stock or commodity.

Future contract are held at any recognized stock exchange which acts a facilitator for both the parties. Both the parties put together a nominal amount, 5%-15% of contract’s value, known as margin value, to minimize credit risk to exchange.

Future contracts are primarily used either to hedge risk due to price fluctuations for buyer as well as sellers or leverage the price movement. Futures contract fixes the price of the asset in advance, henceforth protecting it from the movement in prices during the period. This helps eliminating the risk out of the trading equation.

There are two types of future contracts traders – 1) Hedgers are traders that aim to avoid risk due to price fluctuation due to time by securing the future price. 2) The speculators are the ones that aim to profit from this fluctuation. They aim to buy from hedgers anticipating fall in prices, offset the increment and decrement via buying and selling of bonds.

Overall, it is one of the most innovative and profitable trade method. If done with proper knowledge and instrumentation, it can elevate a trader’s bank balance by folds.

Thoughts@Stockal
At Stockal, we love to watch how markets respond to unique events and how our users (investors - you and old) can make the best use of circumstances to make smart investments. In Thoughts@Stockal, we do deep and broad analysis of such impactful trends and events.

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