What are Futures? Here is a complete guide on how these instruments work, their benefits, and why you should invest in them.
Futures are one of the most interesting financial assets on the market. From “index” to “oil” futures, as well as “mini-futures”, this instrument is part of the everyday life of a trader. But what exactly are futures? How do they work, and when can someone trade them? What are the different types of futures?
This article will analyze everything you need to know about futures.
What are Futures?
Futures are derivative contracts traded on the stock market. With futures, the investor exchanges a certain quantity of a financial or real asset (called an underlying asset) at a specific price and with a deferred settlement for a future date.
In simpler terms, buyers and sellers agree on a future price and date when this transaction will actually take place.
Futures are born, initially, with the aim of hedging a position. Large banks, as well as investment funds and companies, use this tool to hedge a position on an asset, precisely a commodity with which they work.
For example, think of an oil company that bought X barrels of oil. The company, to hedge against the drop in prices, can sell X futures contracts for the commodity in question (oil) to protect itself against any drop in the price of crude oil.
Although born as hedging instruments, futures are also widely used for speculative purposes, since they allow leverage operations on a market that is regulated and highly liquid.
Some trading apps offer more flexible leverage for intraday operations specifically for futures.
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How do Futures work
Futures are said to be a symmetrical contract as both parties (buyer and seller) are obliged to perform a performance at maturity. The operator who buys futures (i.e. who undertakes to buy the underlying at maturity) takes a long position (long), while the operator who sells futures takes a short position (short).
In most cases, futures trading does not end with physical delivery of the underlying asset. Traders prefer to liquidate their positions by reselling a previously purchased futures contract or by purchasing the previously sold futures contract; this saves on delivery costs.
If futures, on the other hand, reach maturity, they can be liquidated for cash settlement (calculating the monetary value), or physical delivery of the underlying asset can take place. In the latter case, the exact quantity and quality of the deliverable goods are fixed by the market in which the contract is exchanged. The size of the contract defines the amount that the seller will have to deliver to the buyer for each contract entered into.
Original article published on Money.it Italy 2022-11-04 10:06:02.
Original title: Futures, cosa sono e come funzionano
