What Are Futures Trading Contracts?
A futures contract has the details of the asset. The market uses a standard contact with information like the unit of measurement, the selling currency, the settlement method, and asset quantity.
These contracts trade in the futures exchange. So, what is futures trading? In the market, one party agrees to buy a commodity or security, and the other agrees to deliver it when the contract expires. On top of that, the exchange decides if there’ll be a physical delivery or a cash settlement.
Example of Futures Trading
One of the best futures trading examples is how this investment option can secure a farmer’s earnings. Since a farmer doesn’t know how a planting season will turn out, it can be wise to use a futures contract. As such, a farmer gets a confirmed price during the planting season, and it doesn’t change months later if the harvest turns out bad.
Why Futures Trading?
One of the reasons the market likes these derivatives is the ability to manage the risk of price changes in an asset. That’s what the market calls hedging. Also, you can speculate on prices.
You may also trade futures contracts to enjoy tax benefits since it has a 60/40 basis. As such, only 40% falls in the ordinary income bracket, unlike stocks.
Types of Futures
There are two futures trading types. Therefore, you either buy or sell a physical item or a financial product. To make it easier to understand, we can group futures into:
Commodities
The options in this group include crude oil, natural gas, and grains like wheat.
Currencies
This can be a real currency or crypto, such as Bitcoin. Your focus here is the exchange rate.
Precious Metals
This type gives you a chance to hedge or speculate on the prices of gold, and silver, among others.
Index Futures
They include the S&P 500 index from CME.
