The futures market offers the opportunistic investor the option of using small amounts of their own money to control huge amounts of products, including gold, currencies, and agricultural commodities.
A futures contract is a legally binding contract to send, if you are selling, or to take sending, if you are trade, of a detail commodity, index, bond, or currency on a predetermined date or cost. A futures contract can include everything from a standard size amount of wheat, oil, or a countrys currency. The amount and date of delivery of the contract are specified, though in almost all cases delivery is not taken as contracts are bought and sold for speculative or hedging purposes.
Futures are utilized by both folks who aid the real commodity and by investors. For illustration, in May a farmer plants a few corn, but does not know what corn will be selling for in November. He can sell a futures contract for November and “lock in” the future selling cost now. On the other hand investors can purchase a futures contract if they believe the cost of a security is leaving to appreciate, or they can sell a futures contract if they believe the cost of a security is going to decline.
Futures are often thought of in the same type as options. While they are both derivatives, in that they derive their price from a few base security, there is single very important difference. While options give the right, but not the obligation to buy or sell the underlying security, a futures contract is a legally binding obligation to buy or sell that same commodity. Thus, while options limit your loss to the cost paid for that option, futures trading can lead to a loss of your entire investment and more to join that obligation.
Another difference between the futures and the equities markets involves the aid of word margin. Although the contract sizes for currencies are larger, an investor does not have to buy or sell a full contract. Rather, a margin deposit on the contract is maintained, which is actually a “good faith” amount of money to ensure your obligations to the full amount of the futures contract. Minimum margin requirements vary by broker, but are typically only a fraction of the contracts total price, and are not related to the real cost of the contract involved.
Futures trading must be made through futures brokers, who control both full service and take off operations, and may be related to the stock brokerage that you already deal with. However, standard discount stockbrokers do not handle futures contracts.