Future Trading Contracts
In form, a future contract is a standardized, legally binding agreement to purchase or sell a certain asset at a certain date in the future, among parties not necessarily known to each other at the time the contract is made. The underlying asset traded is normally a financial instrument or commodity. Futures contracts are generally leveraged instruments. This means that the initial investment will be put on a higher weight than the underlying assets’ value at the time of the transaction. If the value of the underlying asset goes down during the time period covered by the contract, the trader who made the original investment will lose more money than he would have in case the value of the commodity stayed the same.
The major benefit to trading futures contracts is that they reduce risks for the traders. Since the trades are done at the future date, there is no room for margin interests. Traders have to pay taxes on the gains they make under these contracts. The expiration date is an important factor in futures contracts since it marks the time limit for delivery of the asset mentioned in the contract and hence, traders can wait for an agreed upon time before selling the asset.
Forex traders buy and sell a basket of commodities with an expiration date, and then wait for the market data indicated in the futures contracts to indicate the spot price to be realized by the time the basket reaches an appropriate price. At times, the traders buy and sell futures contracts very far in advance, so that when the market data indicating the prices of commodities reaches a specific level, the traders closed their trading positions before the prices hit the designated level. Many online futures brokers provide traders with a platform through which they can place orders for trading commodities using the futures contracts. The brokers give assistance to novice traders, especially to those traders who have just opened their trading accounts.