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Understanding the Factors of Futures Contracts

Updated on August 8, 2022 , 3201 views

When the bell rings and the stock Market closes down for the day, there are some such investors who are still earning money. And, that is solely from a futures contract. However, one essential thing to note here is that futures don’t trade in shares the way stocks do. Rather, they simply trade in standardized contracts.

This fact makes it accurate that futures trading is not appropriate for everyone. Although it is available on varied assets, including indices, stocks, pairs, currency, commodities, and more; but trading futures would not be everyone’s forte.

If still, you are interested in the futures contract, this post is meant to give you a brief idea about this trading form.

Future Contract

Defining Futures Contracts

A legal agreement, futures contracts allow you to purchase or sell a specific security or a commodity asset at a particular price at a specified time in the future. In terms of quantity and quality, futures contracts are already standardized to simplify trading on a futures exchange.

Being a buyer, you take the Obligation to purchase and receive the Underlying asset whenever the contract expires. However, if you are selling the futures contract, you accept the responsibility to offer and deliver the Underlying Asset at the expiry.

Understanding the Working of Futures Contracts

Futures are imitative financial contracts that allow you to transact an asset at a given date and price. Here, you get to buy or sell the underlying asset at a predetermined price, irrespective of the current price in the market at the expiration date.

These underlying assets comprise physical commodities or any other Financial Instrument. These contracts outline the quantity of an asset and are generally standardized to trade on the futures exchange. You can also use these futures or trade speculation or hedging.

To avoid confusion, keep in mind that futures and futures contract are the same things. However, talking about future contract, they are generally specific types of future contract, like gold, oil, Bonds and more. The futures, on the contrary, is a general term that is generally used to talk about the entire market.

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How Does Futures Contracts Trading Take Place?

In simple words, futures contracts are traded specifically for profit as long as the trade gets closed before expiry. Several future contracts get expired on the third Friday of each month; however, contracts may vary as well. Hence, it is essential to keep an eye on the specifications before trading.

Let’s take a future contract example; suppose contracts for January and April are getting traded at Rs. 4000. If you think that the prices will increase before the contract gets expired in April, you can buy the contract at Rs. 4000. If you are buying 100 contracts, you don’t have to pay Rs. 400000. Rather, you would only have to pay an initial margin, typically some amount for every contract.

The loss or profit here fluctuates as the price of contracts keeps moving. If the loss is huge, you would have to give more money to cover it up, which is known as maintenance margin. However, the final loss or profit is assessed once the trade gets closed.

Conclusion

Investing in a futures contract or any other instrument, for that matter, requires ultimate and unwavering knowledge. If you are a newbie, in this situation, you must seek assistance from a professional broker. Such brokers can help you with the market and future exchange scenario to make transactions successful. So, make sure that you don’t make a hasty decision.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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