A future is an agreement between two parties to either buy or sell a certain asset called derivative at a future date and a predetermined time. So basically, the buyer must either purchase the asset or the seller must sell the asset at a certain price irrespective of the present market value. These assets may either be a physical commodity or a financial instrument.
How do Futures work?
To have a better understanding of how futures work a simple illustration will do justice to that.
Consider a commodity like motor fuel:
A road transport company might intend on locking in the price of fuel to prevent any unforeseen rise, so they could buy a futures contract with an agreement to buy a particular amount of motor fuel at a predetermined price to be delivered later in the future.
Also, because of stabilizing its market for fuel, and also to prevent an unforeseen fall in prices, a fuel distributor could sell a futures contract. As evident here, both parties make an agreement on clearly defined terms; which is, to purchase or sell a specified amount of fuel over a predetermined time and price.
Why Trade Future?
Future trading has some mouthwatering and interesting benefits. Here are some of them.
Trading Futures could only need you to deposit a portion of the contract value with your broker.
With Futures contracts, traders have the opportunity to make reasonable profits from the price margin before the closing date of the commodity or the instrument.
It affords companies to hedge the cost of resources or products to be sold to prevent an undesirable fluctuation in price.
Because Future Contracts are traded daily, it makes it very liquid. Orders can also be taken quickly as buyers and sellers are ever-present.
The execution of trading is very fast and efficient.
Transparency: Traders get to see the same quotes, prices, and trades as with all other traders thereby promoting true transparency.
In conclusion, in the global market where prices and values of commodities fluctuate almost every day, traders can use futures trading as a vital tool to easily reduce the risk that comes with the changing market and also to make a profit.
One more amazing thing is that Traders can choose to trade across all the major markets; from Energy, Agricultural commodities, foreign exchange, and even precious metals like Gold, Platinum, and Aluminum, etc.
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