Futures
What Are Futures?
Futures contracts are financial instruments that allow buyers and sellers to agree on the purchase or sale of an asset at a fixed price on a specified future date.
These contracts are used for various purposes, including speculation (betting on price movements) and hedging (managing risk).
The underlying asset can be a commodity (such as gold, oil, or wheat), a security (like stock market indices), or other financial instruments.
Key Features of Futures Trading:
Centralized Exchanges: Most futures contracts are traded on centralized exchanges, such as the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME).
Settlement: Unlike options, which give the right but not the obligation to settle, futures contracts require investors to settle by either delivering the asset or offsetting the position before expiration.
Leverage: Futures provide leverage, allowing traders to control a larger position with a smaller amount of capital.
Expiration Dates: Futures contracts have specific expiration dates, after which they become invalid. Traders need to be aware of these dates.
Perpetual Futures: Some platforms offer perpetual futures, which don’t have an expiry date. Examples include certain cryptocurrency futures.
Advantages of Futures Trading:
Risk Management: Futures allow hedging against price fluctuations. For instance, a farmer can lock in a price for their wheat crop.
Liquidity: Futures markets are highly liquid, enabling quick execution of trades.
Diverse Markets: Trade various assets—stock indexes, energy, currencies, cryptocurrencies, grains, and more.
Access to Leverage: Leverage amplifies gains (and losses), but use it wisely.
Disadvantages of Futures Trading:
Overleveraging: High leverage can lead to substantial losses if not managed carefully.
Expiry Challenges: Traders must monitor and manage positions before contract expiration.
Market Volatility: Futures markets can be volatile, affecting both profits and losses.
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