Futures Contract
Candlefocus EditorFutures are considered more complicated than other investment instruments due to the leverage involved in trading them. Leverage, or the use of borrowed capital, adds to potential rewards but also increases the risk of potential losses. Depending on the type of asset, futures contracts are traded on exchanges or over-the-counter (OTC).
Futures contracts have expiration dates, which set the length of time until the agreement must be fulfilled. Depending on the underlying asset, expiration dates can range from one month to a year, although some exchanges offer special contracts with longer expiration dates. On the expiration date, the buyer and seller of the contract must fulfil their obligation by either delivering or by trading out of their positions with a different contract.
The features of futures contracts also vary widely depending on the asset being traded. Some of the most popular features include delivery date, margin requirements, settlement date, and tick size. Margin requirements determine the amount of money a trader must have in their account to carry and/or close a futures position. The delivery date is the date on which the underlying asset should be delivered. The settlement date is the date on which the contracts are physically or cash-settled, depending on the type of asset. The tick size is the minimum price movement of the asset’s price, usually expressed in points.
Despite the complexities of trading futures, these contracts are regularly used by both institutional and retail investors as a way to diversify their portfolios, reduce risk, manage cash flow, and speculate on market direction with leverage. While experienced investors understand the importance of risk management and leverage, beginners should always seek the advice of a professional before trading futures contracts.