Futures contracts are among the most popular investment products in the world according to IronFX. They’re used to conduct future deals, on a certain date and at a certain sum. Futures contracts are allowed for almost any product on the capital market, including stocks, goods – and indices.
Futures contracts – the agreement between buyer and seller on the time of execution of a deal in the future.
As with the sale of stocks, futures also have two parties to a deal – one selling the product and one purchasing. Despite the fact that it’s a zero-sum game, meaning, one of them will gain and one will lose, the parties act out of opposite beliefs – one believes the index is going to go down, and the other believes it is going to go up. The buyer agrees with the seller to receive, usually only theoretically, a certain amount of the investment product, at a pre-agreed price. The reason for purchasing ahead of time is the guarantee of the price at a future date – because the buyer believes the price of the product is going to go up, states IronFX.
Futures are executed outside of the capital market as well, and the first mention of a futures contract was found in Japan, pertaining to the purchase of rice. This contract was signed in 1730, but it is reasonable to assume that futures were executed between tradesmen before that as well. Futures guarantee that the seller is to receive a pre-determined income at a pre-determined date, whereas the buyer is guaranteed the product on the date set, at a price that is not market value, rather, that set in the contract.
Futures allow the assurance of a purchase in the future of an investment product at an agreed-upon price, explains IronFX. The earnings on the deal lie in the difference between the price agreed upon in the contract and the actual market price of the product purchased on the day of the purchase.
How common is it?
Today, futures are traded on many various investment products, among them, stocks, commodities, bonds, and more. IronFX adds one can also purchase futures on indices. Worldwide, over 80 stock exchanges include futures as well. The trade volume on futures is huge, estimated at over $50 billion every day. Trade turnovers on futures are on the rise, and their popularity has risen significantly – since 2010, trade volumes for this investment tool have doubled.
Two common types of futures
Two types of futures can be spotted on the market:
A Future contract – A standard future contract, stating the product being purchased, the amount, the future purchase date, and the price per unit agreed upon by the buyer and seller. These are common futures, explains IronFX. They can be transferred and traded freely, and most futures are of this type.
Forward Futures – These are personalized, non-standard futures, planned privately between the buyer and seller. These types of futures are common in bank sales of futures, and they are usually not transferrable or resellable.