Futures Contract: The Legally Binding Agreement

Futures Contract: The Legally Binding Agreement


There are many ways in which you can increase your income by more than a hundred percent. One of the options you can take is by investing your money on trade such as commodity trading. There are a number of commodities such as oil, livestock, gold, and many others that you can buy and sell over the market. And one popular and common way of investing in commodities is by engaging in a futures trading contract.



What Really Is a Futures Trading Contract?

You might be hearing about this sort of contract that investors enter while trading with commodities. So what exactly is a futures trading contract? This so-called contract that investors enter into while playing in commodities trade is an agreement between two parties technically called the short position and the long position. The former is defined as the person or body who agrees in supplying the commodity while the latter is the party who receives the goods. For instance, in the case of a farmer and a bread maker where the farmer would be the one to supply the commodity, and of course, the bread maker will be the one to buy the commodity.



Moreover, everything in the futures trading contract should be specified and made certain such as the quantity and quality, specific price per unit, as well as the date the means of delivery. Pricing in the futures contract will have to be agreed and confirmed by the traded commodity and the financial value that is equivalent to the base trade. Hence, in the price contract of 4,000 bushes of grain, the price per bushel should be around $3 depending on the agreement of the two parties.



The Profit and Loss in a Futures Contract

When it comes to the profits and losses that key players encounter in a futures trading contract, these two ups and downs of business investments are highly relative on the everyday flow of market trends that are calculated regularly on a daily basis. For instance, the future contracts for wheat rises up to $4 per bushel. The farmer, from this price movement of the commodity has lost $1 because the selling price for bushel is only $3 per bushel. The bread maker, in turn, will profit since he will pay less from the real price of the commodity.



Because in the futures trading contract prices are adjusted in a daily basis, the transactions will of course be settled in cash and the physical commodity is sold in the cash market. Cash market and futures market prices generally tend to flow in parallel with each other so that when the contract ends, prices will be in unison.



Importance of the Futures Market in the Economy

The futures market is increasingly active and changing. Hence, it is considered as a very good source of significant information on the movement of the market as well as the economy. The discovery of prices is one important factor that the economy can benefit from futures trading. Moreover, risk will also be managed and reduced when purchasing since commodity prices are relatively unstable.