Future Trading Contracts Give Investors the Right to Buy and Sell

Futures trading is the practice of speculating on the possible increase or decrease in prices of certain financial assets. Futures provide a means for both traders and investors to make a profit by anticipating changes in market prices. Most commonly, futures are financial contracts that obligate the seller to sell his asset at a certain date at a certain price and has a specified future date. A futures contract enables an investor to speculate on the future direction of an asset, currency, or a particular financial commodity.

An example of a futures trade would be a producer of oil who needs to increase production in order to keep up with demand from a thirsty world that requires more oil. In order to do this it must purchase spot contracts from refiners at a later date for future consumption. The refiners give these contracts for an agreed upon price and date; when the producer obtains the contract and then sells its asset for delivery at a later date it will receive cash less the amount of the premium received minus the amount it paid to the refiner. This example illustrates how simple future progressive markets work.

With this information it should be clear how simple the process is for an investor or trader to buy and sell future assets. Of course, it must be emphasized that when a transaction is made the seller of the asset typically pays for the transaction. However, since the seller is paying for the services of locating and holding the asset to the buyer of the asset typically pays for the services of making the sale, since the value of the services provided to locate and hold the asset is zero and there are no profit and loss associated with the process. As such the sale of the asset does not impact the balance sheet. Therefore, when a futures contract gives the investor the right to buy or sell at a specified future date at a specified price it is a transaction that does not change the equity or cash flow in the business.