What Is Future Trading? Future Trading With Zerodha Account.
By Brian Perry | Updated December 12, 2017 — 12:53 PM EST
Beginner’s Guide To Trading Futures: Introduction
Beginner’s Guide To Trading Futures: The Basic Structure of the Futures Market
Beginner’s Guide To Trading Futures: Considerations Prior to Trading Futures
Beginner’s Guide To Trading Futures: Evaluating Futures
Beginner’s Guide To Trading Futures: A Real-World Example
Beginner’s Guide To Trading Futures: Conclusion
A futures contract is an agreement between two parties – a buyer and a seller – to buy or sell an asset at a specified future date and price. Each futures contract represents a specific amount of a given security or commodity. The most widely traded commodity futures contract, for example, is crude oil, which has a contract unit of 1,000 barrels. Each futures contract of corn, on the other hand, represents 5,000 bushels – or about 127 metric tons of corn.
Futures contracts were originally designed to allow farmers to hedge against changes in the prices of their crops between planting and when they could be harvested and brought to market. While producers (e.g., farmers) and end users continue to use futures to hedge against risk, investors and traders of all types use futures contracts for the purpose of speculation – to profit by betting on the direction the asset will move
While the first futures contracts focused on agricultural commodities such as livestock and grains, the market now includes contracts linked to a wide variety of assets, including precious metals (gold), industrial metals (aluminum), energy (oil), bonds (Treasury bonds) and stocks (S&P 500). These contracts are standardized agreements that trade on futures exchanges around the world, including the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE) in the U.S. (For more, see How Do Futures Contracts Work?)
This tutorial provides a general overview of the futures market, including a discussion of how futures work, how they differ from other financial instruments, and understanding the benefits and drawbacks of leverage. It also covers important considerations, how to evaluate futures and a basic example of a futures trade – taking a step-by-step look at instrument selection, market analysis and trade execution. If you are considering trading in the futures markets, it’s important that you understand how the markets works. Here’s a quick introduction to help you get started.
How Futures Work
A derivative is simply any financial instrument that “derives” (hence the name) its value from the price movement of another instrument. In other words, the price of the derivative is not a function of any inherent value, but rather of changes in the value of whatever instrument the derivative tracks. For example, the value of a derivative linked to the S&P 500 is a function of price movements in the S&P 500. (For related reading, see Derivatives 101.) One type of derivative is a futures contract.
A futures contract is an agreement between two parties to buy or sell an asset at a specified future date and price. Each futures contract is specific to the underlying commodity or financial instrument and expiration date. Prices for each contract fluctuate throughout the trading session in response to economic events and market activity.
Some futures contracts call for physical delivery of the asset, while others are settled in cash. In general, most investors trade futures contracts to hedge risk and speculate, not to exchange physical commodities – that’s the primary activity of the cash/spot market. Nearly all futures contracts are cash settled and end without the actual physical delivery .
All futures contracts have specific expiration dates. If you don’t exit your position before that date – and it’s a physically settled contract, like corn – you have to deliver the physical commodity (if you’re in a short position) or take delivery (if you’re long).
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