Futures Contracts for Beginners: Learn the Basics


If you are thinking about investing your money on a sure-win situation, you should consider venturing on futures trading. Futures trading is essentially a way of doing business wherein all the business terms are stipulated in a contract, specifically the futures contract. All the pertinent information relevant to the trade can be found in the contract such as the unit price and the cash settlement, delivery date, and the means of delivery including the quantity and quality of the commodity ordered. In essence, a futures contract is an agreement between two individuals or parties to deliver and buy important assets and commodities such as lumber, oil, livestock, metals, and other underlying assets.



Benefits of Futures Trading

The good thing about getting into trade futures is that both parties are spared from uncertainty and it saves them from the trouble of haggling just to get the needed commodity or the underlying asset. Because of futures contract, the trader is secured that he will have his supplies after a specific period of time while the producer is sure that his assets will be disposed upon closure of the futures contracts. The parties and individuals involved in futures trading are categorized into two:



The hedgers are basically the producers, owners, and the consumers of a commodity who are interested in a certain underlying tangible or intangible asset. The main idea of hedgers is to be free from the risk of sudden price changes.

The speculators are the ones who try to make a profit by observing and calculating market moves and opening another contract called the derivative contract. The speculators have no direct participation in the delivery of the underlying asset; they are independent parties who seek to make a profit out of a futures contract. The spectators come up with a derivative contract and offer another related product being traded.

Tradable Assets

There are a lot of assets and commodities, whether tangible or tangible, that can be subjected to futures contracts. Most of these assets are the following:



Securities, such as individual shares

Interest rates and indexes

Currencies

Tangible commodities such as livestock and meat products; agricultural products like food, grains and fiber; forms of energy like natural gas, heating oil, ethanol and crude oil

Precious metals gold, silver, platinum; industrial metals such as nickel, copper, lead and iron; and rare metals

Environmental commodities

Bonds

Exchanges of Futures Contracts

Futures contracts are executed in different markets depending on your underlying asset. Nowadays, with the advent of technology, trade futures can already be done via the Internet. Online futures trading is convenient to most traders because they no longer have to go to a trading pit since an electronic trading system is already available. Futures contracts can be executed in the following financial settings:



Money market

Bond market

Foreign exchange market

Soft commodities market

Equity market

Security and Regulation

Futures contracts are being regulated by an independent regulatory board. Each contract has its own provisions, but it is the regulatory board that imposes sanctions on violated contracts.