What is a Future
A futures contract is a legally binding agreement made between two parties to buy or sell a commodity or financial instrument at an agreed price, on a specified date in the future. With futures contracts, the quantity and quality of the underlying commodity are specified and the future delivery date is fixed. The price is the only variable and is determined through the interaction of buyers and sellers at the time when the contract is first opened.
Futures contracts can be based on commodities like gold, oil and coffee, financial instruments like treasury bonds, stock market indices or shares.
Why Trade Futures?
- Futures contracts trade at centralised, government
regulated exchanges which ensures fair practices. In
addition, exchanges clear and guarantee all transactions, so
investors and traders can have confidence that their trades
will be honoured. Centralised exchanges are also liquid
markets, which makes it easy to establish and offset your
trading positions as desired.
- Liquidity and Spreads. A good number of the major
futures markets are liquid and in some case they are
considerably more liquid than their underlying markets,
which makes it easy to establish or offset your trading
positions. As participation in the futures markets continues
to grow, liquidity rises and bid/ask spreads continue to
narrow. This, in turn, makes the futures markets even more
attractive for traders.