Futures are a type of financial contract whereby an investor is obliged to buy an asset at a specified future price and date. The asset can be any financial instrument or commodity traded in the market.
Future contracts include details of the quantity and quality of the underlying assets. The contracts are standardized that allows trading in the exchange. Some of the future contracts are settled in cash while others require physical delivery of the goods. Investors can make use of a high leverage when investing in futures market as compared to the stock market.
Investors invest in futures market to speculate on the prices of the underlying asset. Additionally, investment in the futures market is used to hedge against possible losses in the event of unfavorable price movements. For instance, an investor in gold can use futures to lock in a certain price, thereby reducing the risk of losses.
An investor that invests money in the future market can take long or short position. A long position is when the investor locks in a price of an asset that he or she will buy in the future. On the contrary, a short position is one where the investor locks in a price of an asset that he will sell in the future. An investor that is holding the long position can go short without entering into a new futures contract.
Note that investing in futures is different from options. With a future contract, an investor is obligated to fulfill the terms of the contract that can be either to buy or sell an underlying asset in the future. Contrarily, an option investor has the right to buy or sell the asset after the expiry period.
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