Futures are normally traded in contracts and are a legally binding agreement between a buyer and a seller. The seller must deliver the specific agreed upon asset at a future date but for the price agreed today.
Futures markets allow companies and individuals to protect themselves against fluctuations in the price of an asset that they are interested in. This allows them to sell an asset in advance giving them the ability to make plans for the future in the knowledge that they have a fixed price.
For new traders the word future can be confusing as the word implies that everything takes place in the future. What actually happens is that the settlement takes place in the future but the price is agreed upon on that day (today).
It also important to realize when trading futures that just because you bought it does not mean that you have to keep it until settlement. You can sell the contract long before delivery of the contract is due.
Like many other markets you also do not need to necessarily own the asset before you sell it. You can sell a futures contract just as easily as you can buy it.
Because futures have been around for such a long time nearly all markets around the world that trade in futures are highly regulated. The fundamental principle of a future is fairly simple.
You buy or sell something at today's price for delivery in a future date. This can prove to be extremely valuable to farmers and organizations to protect themselves against future fluctuations in price.
There are three main reasons for trading futures and they are:
Speculation - Many traders trade the futures market solely for the purpose of speculation. They have no intention of taking delivery of any asset but merely wish to speculate on the direction of the market.
Arbitrage - Is simply trying to make a profit by exploiting the difference in two different markets. If for example you though that the DJIA futures market was trading to high you might attempt to sell the futures and simultaneously buy the cash market.
Hedging - Hedging is common in both the commodities and financial assets. If you owned a portfolio of stocks and you thought that the market was about to correct but you still wanted to keep the stock, you might try to sell the market index of where the stocks where listed.
Got a Question? Ask.
Ask the community a question about this article:
Frequently Asked Questions
Help for possible fake money.
By: Colby | 29-09-2008
How do I verify that some Argentina Pesos that I have are not counterfeit money. I have one 500000, 50000, 10000, 10000, and 5000 Argentina Pesos. I also have one 5000 Argentina Pesos Argentinas.
Viz Global Financial Lenders - Clam Jackson
By: Ladeezip13 | 29-09-2008
Can anyone help to verify if there is a Viz Global Financial Lender company in the UK? The lenders name is Clam Jackson. He says he's licensed and registered.
Ganz Birthstone Cross Pin
By: Loretta | 29-09-2008
Ganz Birthstone Cross Pin
<script language="JavaScript" type="text ...
By: JCB | 29-09-2008
<script language="JavaScript" type="text/javascript" src="http://yedda.com/api/widgets/?d=5&tags=http%3a%2f%2fcusinatojennifer.com.es&max=5&textLength=21"></script>
Are Roth IRAs Insured?
By: Libertybelle | 29-09-2008
Are Roth IRAs FDIC insured? If not, guess its too late... :-(
Yes or No?
By: sendmelord24 | 29-09-2008
Just put Yes or No if you would give $1 to help feed starving people around the world and have a chance to win a $1,000,000 yourself? Thank You So Much!
Q&A Powered by:
Latest Finance Articles
Understanding Debt Consolidation Loans
By: Richard Greenwood | 07/10/2008
It can be all too easy to end up in debt and especially during the current times of financial uncertainty you may find yourself unable to make repayments. Consolidating your debt can make your debts easier to manage and lower your interest charges meaning you become debt free faster.
Credit Card Comparison
By: Richard Greenwood | 07/10/2008
Credit card offers are everywhere and all claim to out do each other. How do you cut through the marketing talk and understand the key features you need to compare to make an informed decision. Find out with this informative article on credit card comparison.
Shopping For Auto Insurance
By: Brenda Williams | 07/10/2008
When you get your license for the first time before you begin driving you need to get car insurance as it's mandatory to have car insurance while driving. Car insurance can be rather expensive, especially for new drivers which is why you'll need to ensure that you're getting the best...
Taking 100% Responsibility - the Prerequisite for Creating Money & Marriage Success
By: Leslie Cunningham | 07/10/2008
It's a simple concept, to refrain from blaming and complaining, and yet it's a challenge to change a habit, especially one that everyone else has. Like sticking to your diet, when everyone else around you is enjoying chocolate cake. Keep reading and you'll find out how this relates to your marriage and finances. Then I'll share some action steps to help you become 100% responsible for your life.
Retirement Income Investing and Your Portfolio
By: Steve Selengut | 07/10/2008
Brokerage firm monthly statements are designed to promote either fear or greed, depending on the current market environment. Nowhere on your statement can you find numbers that report your net investment, your total working capital, or your true asset allocation. Current and projected income numbers are given little attention
Buy to Let Investors Get a Boost
By: Parmdeep Vadesha | 06/10/2008
Buy to let UK investors are in a prime position to take advantage of a new government plan to spur property market activity. The scheme aims to permit property buyers to buy properties worth up to
How to Buy a Repossessed Property for Below Market Value
By: Parmdeep Vadesha | 06/10/2008
Buying a repossessed property is what matters for investors who are keen on reaping high profits. But even with the advantages it poses, there are certain aspects you need to be aware of before you start on the task of acquiring your next property cheaply.
Brits Should Ensure They Have the Cheapest Energy Supplier
By: Abbi Rouse | 06/10/2008
With energy prices escalating steadily, consumers could knock considerable amounts off their utility bills by switching from their areas default supplier.
More from Martin Chandra
How To Impress Any Woman
By: Martin Chandra | 07/03/2007 | Dating
I've learned a secret to impressing women that I'm going to share with you. It's a secret that probably not 1 in 1,000 men know or will ever figure out on his own. The reason that most men will never figure out this particular secret is that it's too obvious.
How Do GMAT Scoring Algorithms Affect You?
By: Martin Chandra | 07/03/2007 | Careers
Recently, I used my extensive experience in this arena to help design the GMAT Exam Simulator software distributed by Upstart Raising to GMAT Preparation providers and tutors worldwide.
Establishing Your Online Domain
By: Martin Chandra | 07/03/2007 | ECommerce
If you're serious about doing business on the Net you need to register a domain name. A domain name represents your company and is your URL. The letters URL stand for Uniform Resource Locator.
Confidence Is Money
By: Martin Chandra | 26/02/2007 | Goal Setting
There is no greater asset for an entrepreneur than an absolute conviction that you know what you're doing. If you don't feel sure of yourself, why should anyone else trust you?
The Way of the Spare Room Entrepreneur
By: Martin Chandra | 21/02/2007 | Advice
Being a spare room entrepreneur is more than just a way of making a living, it is a way of living your life. It isn't an easy way to live. In the past, being in business independently was the norm, and people typically worked and lived in the same place.
Rick Redmont Bases Trading on Wyckoff Theories
By: Martin Chandra | 10/01/2007 | Finance
Off-floor trader Rick Redmont gained his first experience trading stocks as a college student during the bull market of 1961. "I had $10,000, which turned into $20,000. I followed the Chartcraft point and figure book-but it didn't really matter what you bought.
Tom DeMark Relies 100% on Market Timing
By: Martin Chandra | 09/01/2007 | Finance
Trader and consultant Tom DeMark has invented dozens of proprietary technical indicators over the years and relies strictly on the technical principles of market timing for his research and trading. In fact at one point in his career, DeMark went through the CFA program (certified financial analyst), but chose to never complete it.
Tom Bierovic Uses Discretion on Top of His Rules
By: Martin Chandra | 09/01/2007 | Finance
Off floor trader Tom Bierovic, trades according to a set of rules he has developed over the years, but uses his own discretion on top of these rules. Bierovic believes he was lucky because he was introduced to the futures business at a very young age. His father was a trader at the MidAmerica Exchange and Tom would plot daily and weekly bar charts of the agricultural contracts for his allowance money.
Finance 
