Futures, a derivative financial instrument, is a binding agreement between the parties to trade a security or an asset at a pre-agreed future date and price. Futures are advanced financial tools marking the performance of their underlying asset. The assets can be currencies, stocks, bonds, or commodities.
A futures contract like US stock futures is a lock derivative. They seal in the rate of the underlying commodity or asset, i.e. these contracts have a termination date. Upon expiry, the buyer must receive, and the seller must provide the underlying asset at the pre-decided prices.
Futures are accessible for trading and are traded on futures exchanges like New York Mercantile Exchange(NYMEX) or Chicago Mercantile Exchange(CME). The contract’s rate settles at the end of every trading schedule.
There are many futures agreements, where holders indulge in transactions of shares of a company. One more type is commodity futures, where the underlying asset is soybean, wheat, maize, gold, and natural gas. Stock index futures are another kind where they track S&P 500. There are also treasury bonds and silver futures, including stock and commodity futures.
Moreover, there is a difference between futures and options. The former makes honouring the agreement between two parties mandatory before the contract expires. Contract holders may or not exercise rights for the latter. With options, it is optional to honour the agreement, though the holders have the right to do so before contract expiry.
Futures play a fundamental role in the market. These contracts study asset price movements and estimate their future outcomes.
Investors use futures contracts to speculate on the direction of asset prices and profit from their movements. By choosing either a long or short futures contract, traders can position themselves to capitalize on anticipated price changes.
Suppose your firm expects gold prices to rise in the coming months. The company can go for a long futures contract wherein they will buy a specific amount of gold at pre-decided prices in 3 months. Your firm and the supplier must honour the agreement irrespective of whether the gold’s price exceeds or recedes the set price. Comparably, investors undertake a short futures position if they believe the asset prices will fall in future.
Investors often use hedging as a strategy to manage risk in their portfolios, helping them reduce the potential impact of asset price volatility and eliminate uncertainty. For example, if you own a flat and want to protect it from unexpected events like a fire, you could buy fire insurance as a form of hedging to mitigate potential losses.
Trading in futures is complex; thus, by understanding futures, novel investors can assemble sound investment decisions. As a money management platform, Fi offers several investment options. Be it Short-term or Long-term — it's easy to invest with a simple swipe of your phone's screen. Fi also offers a Peer-to-Peer investment feature called Jump that helps beat inflation! Jump helps you earn up to 9% p.a on your investment. But if you want to save up for a short-term goal & earn interest on it, select our super-flexible Smart Deposit. If you're looking for higher/stable returns, opt for a Fixed Deposit.
By studying recent market trends, Future contracts estimate the expected price movements. However, the market is prone to uncertainty. Thus the contracts might not necessarily offer accurate predictions.
There lies a key difference between Futures and Gambling. In gambling, the casino decides the game's rules, whereas, for future contracts, you are the decision maker. To opt for a long futures position or a short one depends on your market analysis and expectation.
The S&P 500 and Dow Jones Industrial Average are prominent indicators of the US stock market, representing a broad range of companies. The Nasdaq Composite index specifically tracks technology and growth-oriented firms.