Futures

In a nutshell, futures are contracts for the later transfer of commodities. The contract can be for the purchase or sale of goods at a fixed price on a certain date, and both parties must honor it.

Terms of Contracts

Futures contracts specify every aspect of a trade: quantity, weight, delivery location, date, and every other arguable point. These contracts have become highly standardized over time, so there is little to no ambiguity in the terms of the agreement. This aspect of futures trading reduces a great deal of risk.

Risks of Futures

Futures originally came about as a means of removing risk from commodities trading. By agreeing to a future trade at a fixed price, the seller is guaranteed to move his supply. This protects the seller from being stuck with surpluses or being forced to sell at a price lower than he can accept, and it protects the buyer from drastic increases in price due to unexpected market demand.

Of course, as with all things, futures do carry risks of their own. If the seller of the contract can’t actually provide the supply promised on the delivery date, he is obligated to purchase the difference himself at the current market price to meet his end of the bargain. And if the market price drops below the price fixed in the contract, the buyer still has to pay the fixed price. Still, the transfer of risk is what makes futures trading so appealing. For each person seeking to minimize the risk involved in his investments, there’s someone willing to take a risk to get a higher return.

Other Types of Futures

In addition to commodities, there are future contracts traded for currency exchanges and even bonds and shares of stock. Such futures can be highly speculative, so consult your investment planner before making any decisions.

Liquidity of Futures

Futures contracts are set to be fulfilled on given dates, and you cannot force delivery of the commodities before the date agreed upon in the contract. Most contracts are settled in cash anyway. There are methods for the transfer of futures contracts, however, which your broker can execute. Naturally it will be difficult to make a profit from the sale of a futures contract whose price is fixed higher than the projected market price for its delivery date, but there are speculators who go against expectation.