If you are new to futures trading, one thing you will have to get your head around is a futures contract. These contracts govern every transaction you will make in your trading journey and come with obligations for buyers and sellers alike. In this article, you can find out everything you need to know to start trading futures with the use of contracts.
Obligations of Buyers and Sellers
A futures contract is a legal agreement between two parties: a buyer and a seller. With this agreement, the buyer is obliged to purchase a commodity at a specified price at a predetermined point in the future. This point is known as the expiration date and when the date has passed, the buyer is obliged to pay the agreed-upon price, and the seller is obliged to provide the underlying asset regardless of the market price of this asset on the expiration date.
What Are Underlying Assets?
The underlying asset in a futures contract can be a physical commodity such as oil, or a financial instrument. Futures traders can be investors who hope to gain a profit through trading or businesses who hope to regulate the price of a certain commodity they require. When you hear the term “futures”, it can also refer to a futures contract. However, this term tends to be more general and can also refer to the futures market.
Types of Futures Traders
There are two main groups of individuals who trade futures: hedgers and speculators. Futures contracts can offer a sense of predictability to both suppliers and purchasers, especially if they need to plan ahead or would encounter trouble if they are unable to buy or sell the underlying asset when required.
Hedgers refer to individuals who place a trade to guard against future price fluctuations. This allows them to lock in the price of a commodity at a specific point, even if the market experiences a tough period nearing the expiration date. On the other hand, speculators are traders who purchase and hold onto assets for a short period of time, and their purpose is to turn around a profit from the difference in price between buying and selling.
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