Futures: What They Are and How They Work

Futures is part of the investment world that few people outside of the field know about or understand. Today, we go back to basics and we explain what futures are and what is different about them. Futures are for the more seasoned investors that understand the game and is ready to take a risk and not allow it to break them.

What are futures?

Futures can be called financial contracts. These financial contracts are set up so the person who wants to buy or sell a certain commodity or another financial instrument, must do so at a set date and price. This means that a buyer must buy an asset at a predetermined date and price or a seller must sell at a predetermined date and price.

Futures Speculation

Futures are used to lower the risk of an investment by managing the potential up or down movement of the prices of assets. To make money with futures, investors will buy assets that speculate will have an upwards movement on a future date. They will set a date and price depending on their speculation. If the speculation is incorrect and the price goes lower, the investor will lose money.

Futures Hedging

Hedging is a technique or strategy used to try and lessen the impact of prices that change during the investment period. Usually, the hedging is done by someone who is involved in the production or usage of the underlying asset of the future. This strategy helps to lock the market price in at the spot where investors would like it to stay.

The biggest difference between the futures market and the stock market is that you cannot decide when to buy or sell. In the futures market, you are contractually bound to wait out the period set and you must buy or sell at the stipulated price. In the stock market, you are free to buy and sell when you want and at the price you want.

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