Futures, in the context of finance and investing, refer to derivative financial contracts whose value is based on an underlying asset, such as stocks, commodities, or indices. A futures contract represents an agreement or obligation between two parties to buy or sell the underlying asset at a predetermined price and date in the future.
These contracts enable investors and traders to speculate on the price movements of the underlying asset, aiming to profit from anticipating its future value. Market participants enter into futures contracts to hedge against potential price fluctuations, manage risks, or engage in investment strategies.
Futures contracts are standardized, meaning they have specific details regarding the quantity and quality of the underlying asset, contract size, and expiration dates. They are mainly traded on organized exchanges, such as the Chicago Mercantile Exchange (CME) or London International Financial Futures Exchange (LIFFE).
The price established in a futures contract is known as the futures price. It reflects market expectations of the underlying asset's value at the contract's expiration date. The difference between the futures price at the time of the contract's initiation and the price at expiration determines the profit or loss for the parties involved.
Trading futures involves a certain level of risk, as investments are subject to market volatility, liquidity issues, and potential margin calls. Therefore, it is vital for investors to gather relevant market information and consider potential outcomes before engaging in futures trading.
