The futures market is amongst the fairest of markets in the world. And they have an array of benefits when it comes to trading commodities. But the catch is that most people don’t even know that futures markets exist, let alone understand their nitty-gritty. This is where we can help.
No worries, because you will soon know the ins and outs of the concept of futures markets through this blog. Read on to get enlightened.
What are futures markets?
Futures markets are financial marketplaces where people participate in trade futures contracts for commodities, currency pairs, interest rates, stock indices, and more at specific rates and future dates.
Thus, futures markets protect the traders and investors from bearing a loss on a transaction even if there is a drop in the commodity or financial instrument price. This is referred to as a futures contract – an agreement between the seller and the buyer.
Expansion of futures trade
The first-ever established futures market happened in Japan in 1710 for rice trading, whereas these markets could have begun unofficially, as early as the 16th century in England. Since then exchanges such as the Chicago Board of Trade First and Lond Metals and Market Exchange have been established and gained immense popularity.
Over the years, technology has bettered and evolved and with the advent of the information age; the futures market has exploded. At present, futures markets hold much more value and popularity over traditional commodity markets, turning into genuine financial futures.
What are futures contracts?
Futures contracts can be easily bought and sold over an exchange. Certain features are an essential part of every future contract. Below mentioned are those features:
- Measurement unit
- Currency unit used in the development of the contract
- Currency unit used in quoting the futures contract
- Quantity and grade consideration should be apt
- Either a cash settlement or a pre-decided product quantity will execute the trade.
In case you plan on starting to trade futures contracts, you should know that you wouldn’t get a physical delivery. Why? Well, most investors wouldn’t wish to commit to signing the receipt showcasing some livestock bought – as the contract goes outdated. If that happens, the traders must figure out what to do with the contract.
What can you trade with futures markets?
In the present day, there is no stop on the trading commodities – these could be something as random as the weather and cellular bandwidth.
Some common commodities to trade as futures products are grains – soybeans, rice, oats, wheat and corn, livestock – hogs, cattle, pork bellies, coffee, sugar, cotton, lumber, and cocoa.
Other future products include energies – ethanol, electricity, gas, oil, and metals – uranium, gold, silver, platinum, and copper. Not many people would know this, but you can even trade stock indices and interest rates in futures markets.
The interest rates include:
- Fed Funds
- 30-Year Bonds
- 10-Year & 5-Year Notes
On the other hand, the stock indices that can be a part of the futures market include:
- S&P 500
- S&P Midcap
- Euro Stoxx
- NASDAQ 100
- Nikkei 225
- FTSE 100
So, that’s a wrap on the basic outline of the futures markets. In today’s world, there is no limit to where this concept can expand – for the volume of futures contracts and of course, the type of things being traded. With some research and further reading, you will be able to understand more profound concepts in these future markets.