Learning Futures

The stock market is an exciting place that gets a lot of news headlines. People hear about it all the time and perhaps they have even participated in the markets themselves from time to time. Trading in stocks and mutual funds is fairly straightforward to a lot of people, but there are more complications when it comes to other derivative products that the market offers. People don’t always understand what these products are or how they work. One of the products that is even less understood in the public than something like Bitcoin is the futures markets. We hope to help change that today.

Also known as futures contracts, these are financial products that obligate the parties who enter the contract to transact on an asset at a predetermined price at a predetermined date. Put in layman’s terms, this is a contract that buyer and seller enter into in order to lock in a particular price on a particular asset at a particular time.

Imagine if you could walk into your local grocery store and have the ability to order products that you want today at a set price going forward. You could say that you wanted to purchase your bread or milk or anything else at a particular price that you and the grocery store agreed to. That is essentially what a futures contract is, but it involves financial assets such as stocks, bonds, commodities, and index funds.

Speculation is encouraged with these contracts. In fact, that is one of the main purposes of investing in a futures contract in the first place. A person seeks to grow their money by taking a bet on the future price of some asset. It is similar to investing in a stock that way except that this is more of an “all or nothing” type of approach.