Futures Trading Overview


With the advent of globalization, where the market for products and services have expanded from local to international and where governments have opened the capitalization of their domestic businesses including corporations to men and women who are non-resident or non-citizens of their countries, the concept of investment evolved to a more sophisticated level. This sophistication brought about the concept on futures trading and futures contracts.



Basic Elements of Futures Trading

To better understand futures trading, it is necessary to break down the definition into understandable basic elements. Futures are defined as:



What are they? They are standard contracts where the parties involved may not know each other.

Contracts to do what? Contract to either purchase or sell underlying instrument.

Purchase or sell what? A specific commodity or instrument, which is called the underlying asset and with quality that is pre-determined or standard.

Purchase or sell when? On a specific future date.

Purchase or sell at what prices? Current market price of the underlying asset.

Where can they be purchased or sold? Futures are traded-bought and sold-in an exchange market just like treasury bills, bonds, and shares of stocks. All cash settlements are done through the exchange market.

Understanding the Concept of Liquidity

Investment in real properties could be very inconvenient sometimes because they cannot be sold in a short period of time. When you need to convert them to cash, you need to find a buyer either on your own or through a real estate agent, and finding prospective buyers could be time-consuming and take a longer period of time than desired. Whereas if you invest your money in futures you could have your money back plus profits over a very short period of time because they are readily convertible to cash due to their high liquidity. Futures trading are very much desirable especially to those who would like to roll their money overnight because of the following standard features:



The underlying asset which could be an instrument such as foreign currency, bonds, or shares or stocks or a commodity such as gold, crude oil, coffee, or even sugar. Whatever the underlying asset involved, it is by nature valuable on its own and very easy to sell.

The settlement of the obligation could either be in cash or the delivery of the underlying asset.

The quantity or amount of the underlying asset that is to be delivered is fixed and even the quality is standard, thus whoever holds the futures is assured that even when their prices fluctuate their underlying assets' quantity and quality is fixed.