Futures Contracts – Pay attention when buying futures contracts

Futures Contracts require more attention while purchasing them because you will not receive physical delivery of any commodity. Instead, you only trade futures against price fluctuation. In this article, we are going to discuss Futures Contracts and how they work. Here we also discuss a few points which you can consider while buying futures. 

What are Futures Contracts?

Futures Contracts are legal agreements that consist of buying and selling specific commodities, securities, and assets at a predetermined price at a particular time period in the future. For allowing futures contracts trading on the Future exchange, they are standardised to verify for quality and quantity.

The person who buys the futures contract will be responsible for receiving the delivery of underlying assets, while the futures contracts will expire. On the other hand, the seller of the futures contract will take responsibility for delivering and providing underlying securities that should be delivered before and nearer to the expiration date. 

In simple words, futures contracts are the financial derivatives that are assigned to buyers to receive the delivery of assets or sellers are assigned to deliver those assets at pre-decided price and timing. An investor needs to predict in what direction security, financial instruments, and commodities will move either for the short term or long term with the help of leverage. These agreements totally depend upon the price fluctuations of the underlying securities so that traders can protect themselves from losses due to price movement. 

How Does Future Trading Work? 

Future Contracts refer to the financial agreements that are imitative in nature, where both buyers and sellers agree to deliver and receive securities at pre-decided costs and dates. To allow the rules and regulations of futures trading, a buyer has to receive the delivery of assets when the seller sells the fundamental assets at pre-decided costs, anyhow of the persuade market costs and its pre-decided future date. The actual assets involve physical commodities and financial instruments. Futures contracts also consist of quantity details on which the fundamental security is systematized to provide trading over a futures exchange. 

Futures trading should be done with the aim of trade prediction or hedging. However, “Futures Contracts” and “Futures” both stand for the same thing. For example, when you hear someone buy sugar futures, that means the same as purchasing sugar futures contracts. Generally, while somebody uses the term futures contracts to indicate something, which means that an individual always indicates a specific kind of future such as bonds, gold, oil, sugar, and index futures. 

When you are looking to invest in oil, Futures contracts are the best and direct way to invest. On the other hand, the term future is generally used for indicating the whole market. Different from forwarding contracts, as we told before, futures contracts are systemized. Typically, the forward contracts and forward are the same kind of agreement that fix at future costs in the current time. Therefore forward contracts should be traded on the counter (OTC) and consist of agreements that can be customised according to both counterparties. Oppositely the future contracts will consist of the similar term of buying and selling, ignoring the counterparty. 

Characteristic of Futures Contracts 

Till here, you understand what futures contracts are and how they work. Now we will explain the characteristics of future contracts. We will discuss the six prime characteristics of futures contracts such:

1. Organised exchange 
2. Standardisation 
3. Margins
4. Clearing House 
5. Marketing to Market
6. Actual delivery take place occasionally

Organised Exchange

Forward contracts should be traded in an over the counter market, whereas the futures should be traded on a systemised exchange at a selected physical spot where trading will be done. This place provides a liquid market in which you can buy and sell futures at any time, similar to the stock market. 

Standardisation

While trading forward currency contracts, The quantity of security should be delivered, and the expiration date can be changed according to the seller and buyer and sometimes tailor-made as per the buyer’s requirements. But in the case of Futures contracts, the expiration date and quantity of delivery of assets should be decided by the exchange on which the contract should be traded. 

Therefore, For example, an individual futures contract in pound sterling over the IMM (International Monetary Market), which is the financial futures exchange located in the US, asks for the delivery of 62,500 British Pounds and contracts are often traded in whole numbers, which means you can’t purchase and sell contracts in fractional numbers. Despite the LIFFE (London International Financial Exchange), a three-month sterling has March, June, September, and December delivery cycles.  

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