Futures are a trading agreement between a buyer and a seller to buy or sell an asset – such as a commodity, currency, or security – at a pre-determined price on a pre-determined future date. Futures are derivatives, which are derived from a primary asset. They are traded on an exchange and are considered to be a form of hedging, or a method of protecting an investment from market volatility.

Futures contracts are more advanced than a regular stock market transaction. The buyer and seller in the contract agree to a certain price and date of delivery of the asset, but settlement is usually delayed until the end of the trading session. Since the purchase and sale of the asset doesn’t occur until the expiration date, investors use the futures contract to speculate on the price of the underlying asset at that time. This can be used as either a hedge against a loss or as an opportunity to make a profit through price appreciation.

Traders who are looking to invest in futures contracts should understand the risks involved as well as the principles that govern the process. Futures trading requires a thorough understanding of market dynamics and a keen eye to successfully anticipate price movements. For instance, investors must understand the difference between long and short positions, the importance of margin and the concept of leverage, as well as the different options for exiting a position prior to expiration.

In conclusion, futures are powerful derivative instruments that can be used to hedge or speculate on the direction of an underlying asset. While there are risks associated with futures trading, understanding the principles behind it can help traders achieve successful outcomes. With the proper education and experience, investors can take advantage of market opportunities afforded by futures differentials.